moral hazard

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pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

Alan Greenspan, Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, bond market vigilante , book value, Branko Milanovic, bread and circuses, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, carbon tax, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, foreign exchange controls, Fractional reserve banking, full employment, German hyperinflation, Great Leap Forward, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land bank, land reform, liquidity trap, Long Term Capital Management, lost cosmonauts, low interest rates, McMansion, mega-rich, military-industrial complex, Money creation, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, proprietary trading, pushing on a string, quantitative easing, RAND corporation, rent control, rent stabilization, reserve currency, risk free rate, riskless arbitrage, Ronald Reagan, Savings and loan crisis, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, Tax Reform Act of 1986, The Great Moderation, the scientific method, time value of money, too big to fail, Two Sigma, upwardly mobile, War on Poverty, Yogi Berra, young professional

The sharp difference on expected outcomes crafted by socialists and conservatives is attributable to how each estimates the behavioral aspects of the problem of moral hazard. The former ignore this effect, thus enhancing the chance of systemic destruction; the latter attempt to stave off disaster through strongly incentivizing market participants to be risk-proof. It may well be that the last stone in the foundation of the construction of the modern socialist state will be laid by the financial community, as it thinks nothing of surrendering its dominion to the government in a time of crisis. The call for a comprehensive government solution to the credit crisis is the ultimate temptation of moral hazard, for the certainty that unsuccessful financial ventures will always be healed by the public treasury creates a nation of financial participants who can pursue upside without the fear of financial ruin.

But most instead took out mortgages on the right hand side and accumulated mutual funds on the left hand side, assuming they would save at all with the complimentary moral hazard of reliance upon state services from Medicare to Social Security. Extremely strong and persistent incentives were codified into law that undermined any attempt by the citizenry to avoid debt, stocks, or real estate. The result is that out of a sense of equity we now find ourselves in the messy predicament of engaging in wholesale printing of money directly and outside the banking sector, which favors statist interests over the private sector, and further erodes any wealth left in the uppermiddle class among those who were prudent in the face of central bank Moral Hazard 155 seduction.

This group continues to inhabit urban zones that have rapidly deteriorated from the 1960s onward coincident with a rise of single-parent families and toleration of the drug and “gangsta” culture. If one is content not to work and can obtain a large percentage of even a subsistence existence from government programs, then the government may be perpetuating a moral hazard, strangulating the urban poor. There is also a spillover effect as middle-class youth emulate such self-destructive behavior, making this in more ways than one a moral hazard for society at large. Conservative economist Walter Williams advises how not to be poor: “First, graduate from high school. Second, get married before you have children and stay married. Third, work at any kind of job, even one that starts out paying the minimum wage.


When Free Markets Fail: Saving the Market When It Can't Save Itself (Wiley Corporate F&A) by Scott McCleskey

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, barriers to entry, Bear Stearns, Bernie Madoff, break the buck, call centre, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, financial engineering, financial innovation, fixed income, Glass-Steagall Act, information asymmetry, invisible hand, Isaac Newton, iterative process, junk bonds, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, place-making, Ponzi scheme, prediction markets, proprietary trading, risk tolerance, Savings and loan crisis, shareholder value, statistical model, The Wealth of Nations by Adam Smith, time value of money, too big to fail, web of trust

Treasury bonds issued by the government, whose safety is more explicitly guaranteed by the people who print the money. The three prevailing interest rates—on C03 06/16/2010 26 11:16:33 & Page 26 Moral Hazard government bonds, on GSEs, and on corporate bonds—reflect the different levels of government backing. As discussed in the following, however, this reflects moral hazard as viewed by a firm’s creditors, not by the firm’s managers. THE REALITY Beyond the theory, the practice of moral hazard is far less straightforward. One way to look at it is to consider those practices that encouraged risk in the years leading up to the financial crisis and ask whether firms had engaged in them because they assumed the government would bail them out if everything went south.

Just Glide to the Next Boardroom,’’ New York Times, December 26, 2009. C03 06/16/2010 28 11:16:34 & Page 28 Moral Hazard in the future, clawbacks in compensation and civil liability. In conclusion, it is hard to imagine that the presumption of a government bailout encourages greater risk taking in the real world. It just does not happen, and it flies in the face of common sense. But moral hazard does have the potential to encourage risk from another quarter: those who lend to the firm. THE OTHER MORAL HAZARD Other than the failing firm, its employees, and owners (shareholders), those who are most exposed to the failure of a financial firm are its creditors.

Better to let the failing firm go down; this is the core of the theory of moral hazard. Moral hazard theory holds that when the government steps in to bail out a firm, and particularly a financial services institution, that firm and all other E1BAPP01 06/16/2010 16:33:45 Page 165 Summaries of Regulatory Concepts and Issues & 165 firms absorb a lesson that firms that are deemed too big to fail will always be bailed out. Knowing that they are now working with a safety net, the theory goes, they will take more risks than they normally would, and even inordinate risks. Whereas systemic risk has moved from theory to painful reality, moral hazard is still largely a theory.


pages: 593 words: 189,857

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

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Bernie Sanders, Black Monday: stock market crash in 1987, break the buck, Buckminster Fuller, Carmen Reinhart, central bank independence, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency risk, David Brooks, Doomsday Book, eurozone crisis, fear index, financial engineering, financial innovation, Flash crash, Goldman Sachs: Vampire Squid, Greenspan put, housing crisis, Hyman Minsky, illegal immigration, implied volatility, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market fundamentalism, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Nate Silver, negative equity, Northern Rock, obamacare, paradox of thrift, pets.com, price stability, profit maximization, proprietary trading, pushing on a string, quantitative easing, race to the bottom, RAND corporation, regulatory arbitrage, reserve currency, Saturday Night Live, Savings and loan crisis, savings glut, selection bias, Sheryl Sandberg, short selling, sovereign wealth fund, stock buybacks, tail risk, The Great Moderation, The Signal and the Noise by Nate Silver, Tobin tax, too big to fail, working poor

The prospect of a similar “rescue” was not much comfort to other systemic firms or potential investors; Bear ceased to exist and its shareholders lost a fortune. The moral hazard theorists simply underestimated the mania, the power of Hyman Minsky’s theory, which I first read in 2007, that stability can breed instability. That said, moral hazard was a legitimate problem. Fannie and Freddie exploited their access to cheap capital—a result of the widespread (and ultimately correct) assumption that the government would stand behind their obligations—to take on way too much leverage and risk, a classic example of moral hazard. The large banks also enjoyed lower-cost financing because of their access to a government safety net, which was one reason they got so large.

The large banks also enjoyed lower-cost financing because of their access to a government safety net, which was one reason they got so large. And there was a real danger that moral hazard created by our actions to resolve this crisis could plant the seeds of a future crisis. I still didn’t think firehouses caused fires—as Stan Fischer put it during the emerging-market crises, condoms don’t cause sex—but resolutions of financial crises always create some moral hazard, and I wanted our reforms to limit moral hazard going forward. It was also tempting, and intuitively satisfying, to blame the crisis on the deceit and fraud and other misbehavior that flourished during the boom—duplicitous brokers luring borrowers into mortgages they couldn’t afford, Bernie Madoff types running wild, securities firms dumping toxic products on unsuspecting clients.

Old Testament vengeance appeals to the populist fury of the moment, but the truly moral thing to do during a raging financial inferno is to put it out. The goal should be to protect the innocent, even if some of the arsonists escape their full measure of justice. Our approach did create some moral hazard, although the critics I came to call “moral hazard fundamentalists” tended to overstate our generosity to failed risk-takers. Shareholders in the five bombs had already absorbed huge losses; the leaders of Fannie, Freddie, and AIG had been pushed out; Lehman had ceased to exist. But the larger point, as President Obama later said, was that you shouldn’t refuse to deploy fire engines to a burning neighborhood in order to highlight the dangers of smoking in bed.


pages: 586 words: 160,321

The Euro and the Battle of Ideas by Markus K. Brunnermeier, Harold James, Jean-Pierre Landau

"there is no alternative" (TINA), Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, battle of ideas, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, Brexit referendum, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, cross-border payments, currency peg, currency risk, debt deflation, Deng Xiaoping, different worldview, diversification, Donald Trump, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, financial deregulation, financial repression, fixed income, Flash crash, floating exchange rates, full employment, Future Shock, German hyperinflation, global reserve currency, income inequality, inflation targeting, information asymmetry, Irish property bubble, Jean Tirole, Kenneth Rogoff, Les Trente Glorieuses, low interest rates, Martin Wolf, mittelstand, Money creation, money market fund, Mont Pelerin Society, moral hazard, negative equity, Neil Kinnock, new economy, Northern Rock, obamacare, offshore financial centre, open economy, paradox of thrift, pension reform, Phillips curve, Post-Keynesian economics, price stability, principal–agent problem, quantitative easing, race to the bottom, random walk, regulatory arbitrage, rent-seeking, reserve currency, risk free rate, road to serfdom, secular stagnation, short selling, Silicon Valley, South China Sea, special drawing rights, tail risk, the payments system, too big to fail, Tyler Cowen, union organizing, unorthodox policies, Washington Consensus, WikiLeaks, yield curve

The rule-based approach worries a great deal about the destruction of value and insolvency and about avoiding bailouts that will set a bad example and encourage inadequate behavior among other actors (economists call this the moral hazard problem). The discretionary approach sees many economic issues as temporary liquidity problems that can be easily solved with an injection of new lending. Here the provision of liquidity is costless: A bailout incurs no losses; in fact, the knock-on effects make everyone better off. There are, in this vision, multiple possible states of the world—multiple equilibria—and the benign action of governments and monetary authorities can shift the whole polity from a bad situation to a good one. To this, the long-faced adherents of the moral hazard view point out that costs will pile up in the future from the bad example that has just been set.

Just as central banks have an incentive to inflate economies ex post given inflation expectations (see chapter 5), they also have an incentive to stabilize the economy through redistribution more than was expected beforehand. Overall, then, both the provision of insurance itself and the tendency of central banks to provide excessive amounts of insurance raises thorny moral hazard problems. There are, however, some actions that the central bank can take to limit the fallout from these moral hazard issues. The first thing to note is that redistribution through interest rate cuts is a very blunt tool and may fuel bubbles. Within any given distressed sector, the benefits of the policy intervention should ideally accrue mostly to those firms who behaved (in comparative terms) the least imprudently.

The rescue of Bear Stearns in March had created moral hazard; there was a need to demonstrate that there was no overall government guarantee for banks and that insolvent institutions should be allowed to fail in a market economy. Hence, when Lehman Brothers encountered a run in September 2008, the government would not help. And, in fact, the press on the Monday after the Lehman collapse almost unanimously welcomed the decision as a victory of market principles. When Lehman set off a global financial crisis, the sentiment was reversed, and the case turned into a powerful demonstration of the dangers of overemphasizing the moral hazard risk.


pages: 566 words: 155,428

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

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, book value, 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, currency risk, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial engineering, financial innovation, fixed income, friendly fire, full employment, Glass-Steagall Act, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, junk bonds, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market clearing, market fundamentalism, McMansion, Minsky moment, money market fund, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, Paul Volcker talking about ATMs, price mechanism, proprietary trading, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, vertical integration, working-age population, yield curve, Yogi Berra

Neither seems imminent. The Ghost of Moral Hazard Past One of the least desirable legacies of the emergency measures of 2008 and 2009 is the creation of moral hazard everywhere. Bailouts, rescues, guarantees, and the like succeeded in saving many investors, companies, and even some executives and traders from oblivion. The moral hazard ayatollahs notwithstanding, doing so was not a mistake. Had we stood firmly on the anti-moral–hazard high ground, our principles would have emerged unscathed but our economy would not have. Necessity mothered pragmatism. But moral hazard is now an undesirable feature of the financial landscape.

JP Morgan’s board minutes later revealed that they had reduced their $4 bid to $2 “because the government would not permit a higher number . . . because of the ‘moral hazard’ of the federal government using taxpayer money to ‘bail out’ the investment bank’s shareholders.” The purchase price was later raised to $10 a share to ensure that Bear Stearns’ shareholders would not vote the “merger” down. Behind the scenes, and invisible to almost everyone, the details of the shotgun marriage that had been hurriedly arranged that Sunday then took about three months for all to agree on. THE MORAL HAZARD DEBATE “Moral hazard” is one of those awkward phrases that is not self-descriptive. In particular, the term, which is borrowed from the insurance industry, has nothing whatsoever to do with morality.

No one denies that moral hazard exists: the debate is over magnitudes and tradeoffs. Using Bear Stearns as a concrete example: Would other Wall Street firms line up for the honor of replicating Bear’s experience? Many moral hazard “doves” thought this unlikely. Perhaps more important are the fates of innocent bystanders. Bernanke, Geithner, and others did not save Bear Stearns as an act of charity or forgiveness. They did it because they feared that a messy failure would do extensive damage to third parties—and to the economy itself. That tradeoff encapsulates the essence of the moral hazard debate. A bailout may mitigate serious problems today.


pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, Boeing 747, book value, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, Eyjafjallajökull, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, foreign exchange controls, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, junk bonds, Kenneth Rogoff, lateral thinking, Lewis Mumford, London Whale, Long Term Capital Management, market bubble, Michael Milken, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, proprietary trading, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, Sam Peltzman, savings glut, scientific management, subprime mortgage crisis, tail risk, technology bubble, TED Talk, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

Jacques, “Society on the Basis of Mutual Life Insurance,” 16 Hunt’s Merchants’ Magazine (1849): 152, 153, quoted in Tom Baker, “On the Genealogy of Moral Hazard,” Texas Law Review 75, no. 2 (1996): 247, available at https://www.law.upenn.edu/fac/thbaker/Tom-Baker-On-the-Genealogy-of-Moral-Hazard.pdf. 2 Thai Life Insurance: It can be viewed here: https://www.youtube.com/watch?v=IkOGwdxcwaw. 3 which stipulates that a man: David Rowell and Luke B. Connelly, “A Historical View of the Term ‘Moral Hazard,’” Geneva Association Insurance Economics Newsletter, January 2012, available at https://www.genevaassociation.org/media/178212/ga2012-ie65-rowellconnelly.pdf. 4 The term “moral hazard”: Rowell & Connelly, “A Historical View.” 5 Children’s advocates: V.

Everyone wants to take their money out at once, and everybody can’t take their money out at once. So there is a need to provide confidence.” Confidence is central to Summers’s thinking about crises. We regard confidence as good and moral hazard as bad, but, he likes to note, they are two sides of the same coin. Moral hazard means encouraging us to take risks by protecting us from their consequences. We assume that’s reprehensible, but it’s not. By providing confidence, moral hazard enables society to do things and take risks that it otherwise wouldn’t, many of which make us better off. To take a very basic example: money is central to a market economy because it makes it possible for people who don’t know one another to do business.

Yet at the time, it is also clear that some officials thought letting it fail would serve a useful purpose: it would purge the financial system of the moral hazard that the rescue of Bear Stearns had created and that had drawn reproof from many quarters. Over the course of the summer, Treasury had tried to make it clear that no similar rescue would await Lehman. Inside the Fed, feelings were more conflicted; Tim Geithner, president of the New York Fed, was adamant that the Fed should keep the bailout option open, but some staffers agreed that bankruptcy was better than a bailout. One staffer said the Fed must not contribute its own money to assist a takeover of Lehman as it had with Bear Stearns because the “moral hazard and reputation cost is too high.”


pages: 491 words: 131,769

Crisis Economics: A Crash Course in the Future of Finance by Nouriel Roubini, Stephen Mihm

Alan Greenspan, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bond market vigilante , bonus culture, Bretton Woods, BRICs, British Empire, business cycle, call centre, capital controls, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, dark matter, David Ricardo: comparative advantage, debt deflation, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, Glass-Steagall Act, global pandemic, global reserve currency, Gordon Gekko, Greenspan put, Growth in a Time of Debt, housing crisis, Hyman Minsky, information asymmetry, interest rate swap, invisible hand, Joseph Schumpeter, junk bonds, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Martin Wolf, means of production, Minsky moment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, Northern Rock, offshore financial centre, oil shock, Paradox of Choice, paradox of thrift, Paul Samuelson, Ponzi scheme, price stability, principal–agent problem, private sector deleveraging, proprietary trading, pushing on a string, quantitative easing, quantitative trading / quantitative finance, race to the bottom, random walk, regulatory arbitrage, reserve currency, risk tolerance, Robert Shiller, Satyajit Das, Savings and loan crisis, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, subprime mortgage crisis, Suez crisis 1956, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, too big to fail, tulip mania, Tyler Cowen, unorthodox policies, value at risk, We are all Keynesians now, Works Progress Administration, yield curve, Yom Kippur War

Lack of transparency, underestimation of risk, and cluelessness about how new financial products might behave when subjected to significant stress are recurrent problems in many crises, past and present. Moral Hazard While the financial engineers who gave us monstrosities like the CDO3 deserve plenty of blame, many other problems were accumulating that went far beyond the obvious flaws in the securitization food chain. The faulty ways in which financial firms governed themselves helped lay the groundwork for the recent crisis as well. The key to understanding this situation is the concept of “moral hazard.” Simply put, moral hazard is someone’s willingness to take risks—particularly excessive risks—that he would normally avoid, simply because he knows someone else will shoulder whatever negative consequences follow if not bail out those who took those risks.

While recent fiscal policies may weigh many countries down in the coming years, debt burdens are not yet at a breaking point for many of the advanced industrial nations, even if issues of public debt sustainability and risks of refinancing crises—if not outright default—are becoming sources of serious concerns for financial markets. The larger problem of bailouts and moral hazard is a bit more complicated. Bailouts of reckless lenders and borrowers can easily lead to even more reckless behavior in the future. That in turn can lead to more bubbles and more crises. But it’s important to keep things in perspective: holding the line on moral hazard in the midst of a crisis can inflict tremendous collateral damage. Why? Imagine that someone living in a huge apartment building has done something extraordinarily reckless and stupid, like smoking in bed.

Fabozzi, “Collateralized Debt Obligations and Credit Risk Transfer,” Journal of Financial Transformation 20 (2007): 47-59. 66 an elegant solution: the CDO: Zandi, Financial Shock, 117-19. See also Janet Tavakoli, Collateralized Debt Obligations and Structured Finance: New Developments in Cash and Synthetic Securitization (Hoboken, N.J.: John Wiley and Sons, 2003). 68 Moral hazard played a significant role: See, for example, Kevin Dowd, “Moral Hazard and the Financial Crisis.” Cato Journal 29 (2009): 141-66. 68 the way these firms provided compensation: Much of the discussion in this section is drawn from Gian Luca Clementi, Thomas F. Cooley, Matthew Richardson, and Ingo Walter, “Rethinking Compensation in Financial Firms,” and Viral V.


Firefighting by Ben S. Bernanke, Timothy F. Geithner, Henry M. Paulson, Jr.

Asian financial crisis, asset-backed security, bank run, Basel III, Bear Stearns, break the buck, Build a better mousetrap, business cycle, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Doomsday Book, financial deregulation, financial engineering, financial innovation, Glass-Steagall Act, housing crisis, Hyman Minsky, income inequality, invisible hand, Kenneth Rogoff, labor-force participation, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, opioid epidemic / opioid crisis, pets.com, price stability, quantitative easing, regulatory arbitrage, Robert Shiller, Savings and loan crisis, savings glut, short selling, sovereign wealth fund, special drawing rights, tail risk, The Great Moderation, too big to fail

Responding too quickly can encourage risk takers to believe they’ll never face consequences for their bad bets, creating “moral hazard” that can promote even more irresponsible speculation and set the stage for future crises. But once it’s clear that a crisis is truly systemic, underreacting is much more dangerous than overreacting, too late creates more problems than too early, and half measures can just pour gasoline on the flames. The top priority in an epic crisis should always be to end it, even though that will likely create some moral hazard; the downsides of encouraging undisciplined risk taking in the future, while real, pale in comparison to the downsides of allowing a systemic collapse in the present.

There’s a fuzzy and hard-to-discern line between a healthy adjustment that inflicts pain on the irresponsible and a panic that imposes indiscriminate damage throughout the system. Systemic crises are not the time for free-market absolutism or moral-hazard purism, because of the serious risks they pose to lending, jobs, and incomes, and because systemic crises rarely end without government substituting sovereign credit for private credit, putting some public money at risk, and, as a consequence, creating some moral hazard. It’s messy, it’s distasteful, but it’s preferable to a financial implosion that sends the broader economy into a tailspin. There will always be investor pressure on central banks to do more to boost markets, and there will always be political pressure on central banks to do less, to teach speculators a lesson.

This kind of haircut makes sense in ordinary times, forcing creditors to suffer the consequences of their unwise loans, but not during panics, when it sends a message that creditors of other financial firms should run. Bair thought our rescues had created too much moral hazard, and saw WaMu’s failure as a teachable moment for the financial system. She was also very protective of the FDIC’s Deposit Insurance Fund, often citing her legal obligation to seek the least-cost option for her agency. But there was a “systemic risk exception” to that obligation when financial stability was at stake, and haircutting WaMu seemed like it would create significant risk of more bank failures, more FDIC losses, more rescues, and more moral hazard. Sure enough, the next morning there was a run on Wachovia, the next domino in line, and the fourth-largest bank in the country by assets.


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

Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, behavioural economics, Ben Bernanke: helicopter money, break the buck, business cycle, 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, Kickstarter, liquidity trap, Long Term Capital Management, low interest rates, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, quantitative easing, Robert Shiller, Robert Solow, school choice, seminal paper, shareholder value, subprime mortgage crisis, the payments system, the scientific method, tulip mania, young professional, zero-sum game

Just like the trader on the Chicago Board of Trade floor, many believe that government intervention encourages moral hazard—households must be made to suffer so that they never again borrow so aggressively. As we discussed in chapter 6, many home owners during the boom did indeed treat their homes as ATMs and spent more as a result. As economists with a strong background in the optimal design of financing arrangements, we have a deep appreciation for moral-hazard concerns. But in this case, we’re not dealing with moral hazard. Moral hazard refers to a situation in which a sophisticated individual games a flawed system by taking advantage of a naive counterparty.

Moral hazard refers to a situation in which a sophisticated individual games a flawed system by taking advantage of a naive counterparty. The classic example of moral hazard is someone driving irresponsibly after getting auto insurance because he knows the insurance company will pay for an accident. If the auto insurance company naively provides unlimited insurance at a cheap price, the driver’s moral-hazard problem could become quite severe. This does not explain what happened during the housing boom. Home owners were not sophisticated individuals who took advantage of naive lenders because they understood house prices were artificially inflated. They weren’t counting on a government bailout, and indeed they never received one.

Yet this responsible home owner, through no fault of his own, experienced the complete loss of his home equity from 2006 to 2009 and was pushed way underwater by the 60 percent decline in house prices. How is the loss of wealth the home owner’s fault? Why should he be punished? Such massive aggregate shocks are not any one individual’s fault and are therefore not well described by the notion of moral hazard. Moral hazard also does not easily apply to the main policies we advocate, because they are not wholesale taxpayer-funded bailouts of home owners. Instead, we advocate a more even distribution of housing losses between debtors and creditors. Is a more even distribution “unfair”? Remember, it is not a wealth transfer to a guilty party from an innocent one.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

"there is no alternative" (TINA), accounting loophole / creative accounting, Alan Greenspan, balance sheet recession, bank run, banking crisis, Bear Stearns, Black Swan, book value, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Greenspan put, Growth in a Time of Debt, high-speed rail, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, low interest rates, market bubble, market clearing, Martin Wolf, Minsky moment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, Phillips curve, Post-Keynesian economics, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, Robert Solow, savings glut, short selling, structural adjustment programs, tail risk, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, Two Sigma, unorthodox policies, value at risk, Washington Consensus, zero-sum game

But why did these bond buyers believe that this new and untested institution, the ECB, would in fact guard the value of their bonds, that national governments didn’t matter any more, and that Greece was now Germany? The answer was, they didn’t need to believe anything of the sort because arguably what they were doing was the mother of all moral hazard trades. Figure 3.2 Eurozone Ten-Year Government Bond Yields Source: European Central Bank Statistical Data Warehouse The Mother of All Moral Hazard Trades If you were a European bank back in the late 1990s seeing sovereign bond yields falling, it might have bothered you since a source of risky profits was disappearing. On the other hand, if this new ECB gizmo really did get rid of exchange-rate risk for the sovereigns issuing the debt and take inflation off the table by housing in Frankfurt the only money press in Europe, then it really was a banker’s dream—a free option—safe assets with a positive upside, just like those CDOs we saw in the United States.

As such, the more risk that you took onto your books, especially in the form of periphery sovereign debt, the more likely it was that your risk would be covered by the ECB, your national government, or both. This would be a moral hazard trade on a continental scale. The euro may have been a political project that provided the economic incentive for this kind of trade to take place. But it was private-sector actors who quite deliberately and voluntarily jumped at the opportunity. Now, either because they really believed that the untested ECB had magically removed all risk from the system or saw the possibilities of a moral hazard trade, or both, major European banks took on as much periphery sovereign debt (and other periphery assets) as they could.

Public choice theory, like any universal gizmo, has not only helped revolutionize the institutional relationship between voters, politicians, and bankers in democratic societies, it has become, as Daniel Dennett said about evolution in Darwin’s Dangerous Idea, the “universal acid” that eats away everything it touches by turning everything into a principal-agent/rent-seeking problem.74 Think that countries in a currency union might actually come to each other’s aid out of a sense of solidarity? Don’t be so naïve. Moral hazard is ever present. Worried that you can’t tell what the future may hold? Don’t worry. Properly defined rules will make the future conform to your preferred vision. Terrified that profligate governments will not reform their economies when you compensate for their unemployment through transfers? You are right. They will not do so, they will “hide and rent seek” off your taxpayers; so their governments should be replaced with ones that you can trust. Welcome to Europe. The moral hazard logic embedded at the core of public choice arguments covers, and infects, all possible circumstances.


pages: 241 words: 81,805

The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis by Tim Lee, Jamie Lee, Kevin Coldiron

active measures, Alan Greenspan, Asian financial crisis, asset-backed security, backtesting, bank run, Bear Stearns, Bernie Madoff, Bretton Woods, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, currency risk, debt deflation, disinformation, distributed ledger, diversification, financial engineering, financial intermediation, Flash crash, global reserve currency, implied volatility, income inequality, inflation targeting, junk bonds, labor-force participation, Long Term Capital Management, low interest rates, Lyft, margin call, market bubble, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, negative equity, Network effects, Ponzi scheme, proprietary trading, public intellectual, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, rising living standards, risk free rate, risk/return, sharing economy, short selling, short squeeze, sovereign wealth fund, stock buybacks, tail risk, TikTok, Uber and Lyft, uber lyft, yield curve

In Chapter 2, when discussing currency carry trades, we emphasized the involvement of central banks in the process, which creates a form of moral hazard. The intervention of central banks in currency markets along with the knowledge that the central banks will be prepared to intervene in the event of large currency exchange rate movements makes currency carry trades more attractive. The idea that all carry trades are aspects of the same broad phenomenon, and that therefore there must be an equivalence between currency carry trades and stock market volatility-selling trades, would suggest that volatility selling by the central bank must create moral hazard. In other words, it would seem to suggest that quantitative easing and the resulting size of the central bank balance sheet could serve as a quantitative measure of moral hazard.

It is a small step from those insights to recognize that as the convergence toward the vanishing point takes place, there will be a simultaneous convergence of the carry trade on one carry instrument—the S&P 500 itself. In the background of this convergence under the global carry regime is the globalization of central bank-created moral hazard. We have stressed in this book that the moral hazard created by central bank policies has played a fundamental role in the rise of carry in financial markets. Low or zero inter- 196 THE RISE OF CARRY est rates in the major developed economies, bailouts, central banks’ quantitative easing policies, and their implicit promise to intervene in the event of market “instability” have all encouraged investment or speculative strategies that seek to extract a return from expectations of low market volatility.

See European Union euro area crisis, 113 euro-funded carry trade, 31 European Central Bank, 31, 104, 113, 136, 198, 216 European Union (EU), 198 evolution, cumulative advantage and, 188–190 exchange rate risk, 12–13 of dollar carry trade, 17 exchange rates carry strategy returns and stability of, 52 currency carry trades and, 9, 10 INDEX exchange-traded funds (ETFs), 111–112 exchange-traded notes (ETNs), 90, 92 Facebook, 185 financial assets loss of moneyness of, 215 US household holdings of, 118, 118f financial crises, volatility spikes in, 52 financial institutions, carry growth and growth of, 69 financial markets, 1 carry and structures of, 7 carry as cumulative advantage mechanism in, 183 central bank stabilization of, 5–6 desires of, 193–195 increasing complexity of, 57 financial volatility, suppression of, 1 Ford, Harrison, 184 foreign exchange markets carry trades on, 2 central banks and, 11, 13, 20 forward exchange rates, interest rates and, 10 funding currencies, 10 melt-up in, 23–24 volatility in, 215 futures VIX, 90–92 volatility bets with, 89 gamma, 149–150 selling, 152–153 for S&P 500, 154, 154f gates, 72 GDP carry regime and, 115–116 growth in, 56 profits as share of, 139 US personal net worth in relation to, 137, 138f global business cycle, carry and, 2 global capitalism, 195 global economy, carry dominance of, 69 global financial crisis of 2007–2009, 1 Asian financial crisis compared with, 30 carry bubble after, 136 credit bubbles and, 36 currency and equity carry trade correlations and, 59 225 dollar carry trade collapse during, 17 experimental monetary policies during and after, 113 government guarantees for funds during, 113 as last chance to lean against carry, 220 short-term interest rate collapse after, 62 yen currency carry trade and, 28, 29 global financial markets carry dominance of, 69 complexity of, 127 transformation of, 83–84 global monetary policy, carry effects on, 3 global volatility, 99, 101 globalization, of moral hazard, 195–200 gold bugs, 113–114 gold prices, 113 government policies, carry trade returns and, 48 Greenspan, Alan, 26 hard money, 113 Heathcote, Gilbert, 179 Hedge Fund Research (HFR), 73 hedge funds as agents of carry, 72–73 carry trading by, 73–75 compensation structure, 73 employee compensation and, 73 growth of industry, 73–74, 83, 194 leverage usage by, 73, 74 liability categories for, 72 HFR (Hedge Fund Research), 73 high-frequency trading firms (HFTs), 84 Hungarian forint, 34 IMF (International Monetary Fund), 14, 16, 198 implied volatility, 57, 90, 164, 167–168 anti-carry regime and, 171–172 realized volatility relationship to, 158 income streams, from carry trades, 2 India, 19 industrial production growth, 56 inflation alternative monies and, 211 anti-carry crashes and, 170 anti-carry regimes and, 211, 212 asset price, 113–114 226 inflation (continued) carry bubbles and, 39 interest rates and, 110–111 information ratio (IR), 49 institutional liabilities, 69–70 insurance, 34–36 interest rates Australia and spreads of, 41–42, 60–61 bailouts and, 198–199 covered interest parity principle and, 21 credit demand and, 110 currency carry returns and differentials in, 60–62 currency carry trades and, 9, 10 forward exchange rates and, 10 global financial crisis of 2007–2009 and, 62 inflation and, 110–111 in Japan, 23 profit share and, 139 spreads in, 60–62, 60f, 81 Turkey, 12–13 UIP and, 47, 48 US Federal Reserve and, 14, 137, 208 International Monetary Fund (IMF), 14, 16, 198 investment banks, proprietary trading by, 77 IR (information ratio), 49 Italian lira, 60 Japan currency carry trades and, 17–18, 27 current account surplus, 27 foreign reserves holdings, 26 interest rates, 23 net short-term foreign assets of banks in, 28–29, 28f Lehman Brothers, 104, 140, 197 collapse of, 29 leverage, 3 carry and importance of, 70–72 carry crashes and, 96–98 carry growth and, 7 in carry trades, 33–35 constant, 93 in currency carry trades, 11 equity and, 93–94 hedge fund usage of, 73, 74 INDEX risk controls and, 65 trade dynamics and, 65 leveraged buyouts, as carry trades, 78–80 liquidity, 3–4 carry crashes and, 128 carry existence and, 190 carry trades providing, 35–36 central banks and, 110–111 currency carry trade and provision of, 88 of emerging currencies, 62 negative pricing of, 166–168 short squeezes on, 165 S&P 500 premiums for providing, 161 volatility curves expressing price of, 164 liquidity backstop, 86 liquidity provision trades, 84 return-to-risk ratio of, 165 liquidity swaps, 104–105, 196–198 lock-ins, 185 Long-Term Capital Management (LTCM), 23, 25, 27, 74 Lucas, George, 184 Madoff, Bernard, “Bernie,” 140–141 market corrections, 79 market discipline, 199, 200 market making, 84, 158–159 market risk, 99 mean reversion, 152, 154f, 155, 164 Microsoft Office, 185 Ministry of Finance of Japan (MOF), 26 mispricing of risk, 21, 35–37, 132, 134–140, 142 MOF (Ministry of Finance of Japan), 26 momentum, selling optionality and, 153 monetary conditions anti-carry regime and, 174 carry bubbles and, 39 monetary equilibrium, carry regime and, 169 monetary growth, carry regime and, 169 monetary policy carry effects on, 3 moral hazard and, 208 money. See also specific currencies alternative, 211 asset bases for, 211 availability of, 4 in carry regime, 108–113 creation of, 109 INDEX defining, 109 Divisia, 111 statistical measures of, 109 US household holdings of, 117, 117f VIX and value of, 100, 122 volatility and value of, 98–101, 122 money market funds, government guarantee for, 113 money supply, 20, 21 business cycle and, 125–126 carry crashes and, 122–123 monopoly power, 176 natural, 186 moral hazard central banks and, 195, 200 globalization of, 195–200 monetary policy and, 208 mortgage bubble, 36 movie stars, 184–186 multiple equilibria, 183 natural monopolies, 186 negative yields, 70 net claims Australia, 40, 40f currency carry trade measurement and, 41 Turkey, 43, 43f net foreign assets, 14, 16, 29 network effects, 185 New Zealand, interest rate spreads and, 60–61 New Zealand dollar, capital flows into, 62 nonbank financial sector, 137 nonmonetary assets carry bubbles and, 169 carry regime and, 112, 114, 122 Norway, sovereign wealth fund, 75 OECD (Organisation for Economic Co-operation and Development), 115 oil carry trade, 128–133, 132f oil prices, 129f, 131 oil producers, debt levels of, 130 “The Optimal Design of Ponzi Schemes in Finite Economies” (Bhattacharya), 142 optionality buying, 146 227 selling, 152, 153 volatility and, 93–95 options delta hedging, 149–151 delta of, 149 gamma of, 149–150 pricing of, 149 unhedged, 150 volatility and, 146–148 volatility bets with, 89 volatility implied by, 57 Organisation for Economic Co-operation and Development (OECD), 115 output gap, 125 Panic of 1907, 218 personal net worth, 137, 138f photosynthesis, 189 pi Economics, 27–29 Piketty, Thomas, 219 poker, 182–183 Polish zloty, 34 Ponzi schemes, 140–143 Pope, Alexander, 179 popularity, 181–182, 184 populist political movements, 1 portfolio insurance, 155 portfolio volatility, 159 power, carry as, 191–192 pricing kernel, 99 private equity leveraged buyouts, as carry trades, 78–80 productivity, 115 profit share, 82, 137, 138f, 139 proprietary trading, compensation incentives and, 77 public intellectuals, 186 put options, 34, 89 selling fully collateralized, 156n4 QE.


End the Fed by Ron Paul

affirmative action, Alan Greenspan, Bear Stearns, Bernie Madoff, Bernie Sanders, Bretton Woods, business cycle, crony capitalism, currency manipulation / currency intervention, fiat currency, Fractional reserve banking, guns versus butter model, hiring and firing, housing crisis, illegal immigration, invisible hand, Khyber Pass, Long Term Capital Management, low interest rates, market bubble, means of production, military-industrial complex, Money creation, moral hazard, Ponzi scheme, price mechanism, reserve currency, road to serfdom, Robert Gordon, Ronald Reagan, Savings and loan crisis, too big to fail, tulip mania, We are all Keynesians now, Y2K

The apparent prosperity based on the illusion of such wealth and savings led to misdirected and excessive use of capital. The false information generated by the Federal Reserve policy led to a false confidence that all would be well. This illusion is referred to as moral hazard. Anything that is seen as protection against risk causes people to act with less caution. Even if their actions may seem risky, someone else suffers the consequences, and moral hazard will encourage bad economic behavior. Knowing that savings were no longer required to get a loan from a bank, since easy credit came from the Federal Reserve, many a banker and borrower were encouraged to “gamble” on business ventures.

It is easy to accept this risk, especially in the boom part of the business cycle, with stock, land, and housing assets all going up in nominal value. Beneath the surface, they were buying into a moral hazard, that is, they were being rewarded in the short term for activity that would in the long term prove to be detrimental to everyone. Competitive pressures in the banking industry made it impossible for most to resist the chance for a quick profit. Moral hazard, from whatever source, is detrimental because it removes the sense of responsibility for one’s own actions. The more socialized the society, the less the sense of personal responsibility for one’s own behavior; responsibility becomes collective.

There are other benefits as well, such as stopping the business cycle, ending inflation, building prosperity for all Americans, and putting an end to the corrupt collaboration between government and banks that virtually defines the operations of public policy in the post-meltdown era. Ending the Fed would put the American banking system on solid financial footing. The industry would thrive without the moral hazard of banks that are “too big to fail.” Its loan operations would take a more realistic account of risks, and the bank’s capital would not be put at risk in the service of politically driven priorities. Customers’ deposits would be safer than they are today, as banks would compete with one another in their most important function of providing a secure means of preserving wealth.


Global Governance and Financial Crises by Meghnad Desai, Yahia Said

Asian financial crisis, bank run, banking crisis, Bretton Woods, business cycle, capital controls, central bank independence, corporate governance, creative destruction, credit crunch, crony capitalism, currency peg, deglobalization, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, floating exchange rates, frictionless, frictionless market, German hyperinflation, information asymmetry, Japanese asset price bubble, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, low interest rates, market bubble, Meghnad Desai, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shock, open economy, Post-Keynesian economics, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

However, in the case of Brazil, real interest rates not only start at a much higher level than other Latin American countries, but (for reasons discussed in detail in another paper on Brazil16) they are never allowed to fall anywhere near the values of ‘route 1’ countries (let alone ‘route 2’ countries). The case of Brazil is very important from the point of view of a critique of mainstream ‘moral-hazard-type’ crisis-analysis. For example, according to the McKinnon and Pill approach to financial crisis the main cause of borrowingagents losing their capacity to assess and price their risk properly is that internal and external moral hazards lead to ‘artificially’ low interest rates; these, in turn, gave a false incentive to agents to accumulate excessive amounts of risk.17 However, in Brazil high interest rates did not seem to have been able to avoid a financial crisis either.

While a financial meltdown is a rare occurrence in developed country markets, the frequency of such events in periphery is worrisome. In the last ten years, we have had crises in Mexico, Indonesia, Thailand, Malaysia, South Korea, Brazil, Argentina and Turkey. There is financial fragility in India and China. The uneasy marriage of moral hazard of lenders lending to sovereign governments in the knowledge of a certain bailout and the inability of sovereign borrowers to follow time-consistent strategies in shaping their debt profile is becoming a major problem. The questions are many but the answers are few. This volume attempts to address some of the questions raised by the string of financial crises over the past ten years.

In early December, the initiative shifted to the US Treasury that led an international lender of last resort (LOLR) rescue with a private sector involvement. This episode introduced a concept foreign to the Fund’s practice initiated in the Mexican crisis, consisting in bailing out international banks entirely, thus creating maximum moral hazard. The Asian crisis raised doubts on the Fund’s legitimacy in the American Congress and like-minded ultra-liberal economists in the academic community. Without contemplating such an extreme view, a serious debate has been raised on the future of the IMF. Since the time of the C20, it has been the first debate to argue about principles, not only technical matters.


pages: 478 words: 126,416

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

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, Cornelius Vanderbilt, corporate governance, Credit Default Swap, cross-subsidies, currency risk, dematerialisation, disinformation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Greenspan put, Growth in a Time of Debt, Ida Tarbell, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jim Simons, John Meriwether, junk bonds, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, M-Pesa, market design, Mary Meeker, megaproject, Michael Milken, millennium bug, mittelstand, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, Paul Volcker talking about ATMs, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, reality distortion field, regulatory arbitrage, Renaissance Technologies, rent control, risk free rate, risk tolerance, road to serfdom, Robert Shiller, Ronald Reagan, Schrödinger's Cat, seminal paper, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, vertical integration, Washington Consensus, We are the 99%, Yom Kippur War

‘Too big to fail’ takes responsibility for the supervision of credit risks away from market participants and places it more or less exclusively in the hands of regulators: a duty that in this instance (and many others) they were not capable of discharging. The term ‘moral hazard’ is perhaps unfortunate, because moral hazard is about incentives, not about ethics: about deterrence rather than punishment. Timothy Geithner appeared to have missed this point – his memoir makes frequent reference to moral hazard, almost invariably accompanied by a disparaging reference to ‘Old Testament fundamentalists’.32 Presumably this is with the intention of contrasting the retributive ethos of the Old Testament with the forgiveness found in the New.

Many might feel retribution rather than forgiveness appropriate for those responsible for the global financial crisis. But those who worry about moral hazard are not motivated by revenge. Moral hazard in its application to the banking system is the well-founded concern that, if there is an expectation of government assistance for troubled financial businesses, the people who run and trade with these businesses will behave in ways that make the need for such assistance more likely. In Michel Albert’s Swiss village, community pressures handled the problems of information asymmetry, adverse selection and moral hazard. Information asymmetry was reduced, though not necessarily eliminated, by geographical proximity and personal ties.

Still, the sense that Central Banks and Treasuries act as backstop has influence on the behaviour of a firm: Dick Fuld of Lehman was delusional both about the risks in his business and in his belief that Lehman both should and would receive support if it ran into financial difficulties. If Fuld had not made these errors, he would have made greater efforts to sell Lehman’s business before it collapsed. But the more serious problem of moral hazard is its impact on those who deal with banks. If potential creditors know that they will be made whole, then they have little incentive to undertake careful credit assessment. In the sub-prime mortgage fiasco such moral hazard arose at every level. Fannie Mae and Freddie Mac, the failed US mortgage agencies, could not conceivably have built their enormous, and severely under-capitalised, balance sheets had their lenders not believed (correctly, as it turned out) that their liabilities were guaranteed by the US government.


pages: 590 words: 153,208

Wealth and Poverty: A New Edition for the Twenty-First Century by George Gilder

accelerated depreciation, affirmative action, Albert Einstein, Bear Stearns, Bernie Madoff, book value, British Empire, business cycle, capital controls, clean tech, cloud computing, collateralized debt obligation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversified portfolio, Donald Trump, equal pay for equal work, floating exchange rates, full employment, gentrification, George Gilder, Gunnar Myrdal, Home mortgage interest deduction, Howard Zinn, income inequality, independent contractor, inverted yield curve, invisible hand, Jane Jacobs, Jeff Bezos, job automation, job-hopping, Joseph Schumpeter, junk bonds, knowledge economy, labor-force participation, longitudinal study, low interest rates, margin call, Mark Zuckerberg, means of production, medical malpractice, Michael Milken, minimum wage unemployment, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, mortgage debt, non-fiction novel, North Sea oil, paradox of thrift, Paul Samuelson, plutocrats, Ponzi scheme, post-industrial society, power law, price stability, Ralph Nader, rent control, Robert Gordon, Robert Solow, Ronald Reagan, San Francisco homelessness, scientific management, Silicon Valley, Simon Kuznets, Skinner box, skunkworks, Solyndra, Steve Jobs, The Wealth of Nations by Adam Smith, Thomas L Friedman, upwardly mobile, urban renewal, volatility arbitrage, War on Poverty, women in the workforce, working poor, working-age population, yield curve, zero-sum game

The near bankrupt government may even be tempted to consolidate its dangers in war—the one risk that the state can manage far better than business. But the entrepreneurial ventures of a Napoleon ill-behoove the modern ruler. In the delicate balance between the risk and insurance features of capitalism, the boundaries are defined by what insurance companies term moral hazard. Moral hazard is the danger that a policy will encourage the behavior—or promote the disasters—that it insures against. This is the limiting point in insurance schemes and it sets the natural boundary of welfare in a capitalist system. Just as a siege of saving, or hoarding of gold, impelled by a fear of economic trouble, may cause depression by greatly reducing consumer demand, so a siege of insurance can bring about some of the dangers that motivate it.

It no longer responds so well to the bad news of scarcity and disequilibrium—the high prices that signal new opportunities—and no longer provides so dependably the good news of creativity, invention, and entrepreneurship. This is the overall moral hazard of the welfare state. But all insurance and welfare programs do not present this problem, and some of them compensate for it by creating an atmosphere of safety more hospitable to long-range ventures and investments. The leaders of capitalism must become more discriminating in appraising the claims and demands, dangers and benefits of the eleemosynary state. It is not an alien presence but the now burly offspring of an essentially capitalist idea. The moral hazards of government programs are clear. Unemployment compensation promotes unemployment.5 Aid to Families with Dependent Children (AFDC) made more families dependent and fatherless.

Excluding measures focused on the elderly, a resourceful welfare family could get benefits from some seventeen programs, among them AFDC, Medicaid, food stamps and supplemental foods, a variety of social, legal, and child-care services, and an array of housing grants and subsidies.7 Even overlooking the very important benefits of leisure time and unreported earnings, welfare subsidies in general pose a very grave danger of moral hazards, such as workforce withdrawal, familial breakdown, and other adjustments to the terms of the grants. Such welfare systems, at levels that heavily influence lower middle-class families as well as the poor, illustrate the famous tendency of “poverty” programs to reach far beyond their mandate. Poor families alone, however, received average benefits that brought them some 30 percent above the official “poverty line,” something that could only be achieved by two full-time workers at the minimum wage.8 Again, the potential for moral hazard emerges clearly. Most of these programs expanded steadily through the entire period of economic and employment growth of the late seventies, creating a sense of dependency in millions of families seemingly capable of self-support.


pages: 469 words: 142,230

The Planet Remade: How Geoengineering Could Change the World by Oliver Morton

Albert Einstein, Anthropocene, Apollo 13, Asilomar, Boeing 747, British Empire, Buckminster Fuller, carbon credits, carbon tax, Cesare Marchetti: Marchetti’s constant, colonial rule, Colonization of Mars, Columbian Exchange, decarbonisation, demographic transition, Dr. Strangelove, electricity market, Elon Musk, energy transition, Ernest Rutherford, Garrett Hardin, germ theory of disease, Haber-Bosch Process, Intergovernmental Panel on Climate Change (IPCC), James Watt: steam engine, Jeff Bezos, John Harrison: Longitude, John von Neumann, Kim Stanley Robinson, Kintsugi, late capitalism, Louis Pasteur, megaproject, Michael Shellenberger, military-industrial complex, moral hazard, Naomi Klein, negative emissions, nuclear winter, ocean acidification, oil shale / tar sands, orbital mechanics / astrodynamics, Philip Mirowski, planetary scale, plutocrats, public intellectual, renewable energy transition, rewilding, scientific management, Scramble for Africa, Search for Extraterrestrial Intelligence, Silicon Valley, smart grid, South China Sea, Stewart Brand, systems thinking, tech billionaire, Ted Nordhaus, Thomas Malthus, Virgin Galactic

One spur of particularly well-rehearsed argument is the risk that simply talking about climate geoengineering will lead to less climate mitigation – the same concern that contributed to the marginalization of adaptation efforts in the past. This is often called the ‘moral hazard’ problem. In economics, the moral hazard of an insurance policy is the extent to which it encourages the insured to take more risks. Thus, subsidized flood insurance encourages people heedlessly to build on flood plains; likewise, the knowledge that banks have a very good chance of being bailed out if things go wrong encourages bankers to take self-serving risks. In geoengineering, ‘moral hazard’ has been used to describe the expectation that if cooling technologies seem a real possibility, people will put less effort into reducing carbon-dioxide emissions.

Germany is also home to the world’s most ambitious strategy for moving away from fossil fuels towards renewable energy, the Energiewende. Even if it does not currently look politically germane, though, the moral-hazard point has to be taken seriously. It does seem likely that, other things being equal, an increased role for climate geoengineering in climate policy would reduce the pressure for emissions reduction. This is not necessarily a negative. For moral hazard to be a problem, you need to show that the behaviour it is encouraging is actually a bad thing. Climate geoengineering research thus raises a real moral hazard only if it reduces action on mitigation without making progress of its own in reducing the risks of climate change.

This fear is clearly related to the persistent nightmare of a ‘superfreak pivot’ in which the American right moves overnight from a position of not wanting to act on climate at all to wanting to act only through some sort of crash geoengineering programme. But moral hazard is a broader issue than that. The superfreak pivot imagines a new enthusiasm for geoengineering; the moral-hazard worry doesn’t require enthusiasm for geoengineering, merely a slacking off on emissions reduction because geoengineering is thought to be an option. If people believe that there’s a plan B that could work, they will pursue plan A with less vigour.


pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, benefit corporation, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, break the buck, Brownian motion, Carmen Reinhart, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial deregulation, financial engineering, fixed income, geopolitical risk, Glass-Steagall Act, Greenspan put, high net worth, Hyman Minsky, interest rate derivative, invisible hand, junk bonds, Ken Thompson, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Martin Wolf, Michael Milken, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

Paulson had a surprising response: The price should be lower.17 The secretary was hypersensitive to the charge that Washington was helping Bear’s shareholders, cushioning the impact of failure and thus dulling the perceived incentive of other banks to monitor their risks. (In the language of economists, policies that weaken such incentives and encourage excessive risk-taking create a “moral hazard”; it was a charge that had often been leveled at Greenspan.) Morgan settled on $2 a share, prompting howls of protest from Bear. Critically, Morgan agreed to provide a backstop—to guarantee Bear’s trades—so that Bear could remain in business until the deal closed, and the Fed agreed to finance, and absorb any losses on, $29 billion of Bear’s most problematic assets.v Essentially, the taxpayers would cover Jamie Dimon’s downside.

These actions did not, as some argued, entice firms to fail, but they did sustain their ability to take the sort of risks that might lead to failure. In particular, they encouraged lenders to keep lending. The press focused on whether the price paid for Bear’s stock imposed a sufficient penalty on shareholders,w but the real moral hazard was that people who had lent to Bear suffered no pain at all. In fact, they were rewarded. Prior to the acquisition, Bear’s credits traded at a discount. (Its IOU was worth much less than face value, or “par.”) Once its debts became the obligation of JPMorgan, they returned to par. Robert Barbera, a prominent Wall Street economist, naturally counseled clients that they could count on the United States to back up Wall Street credits.22 Thanks to the Fed, the lending could go forth; thus was the illusion of solvency sustained.

In the spring, he even hired two of his former Goldman cronies, guaranteeing them each tens of millions of dollars—evidence anew of the compensation disconnect at a bank losing billions every quarter.30 The regulators that spring were more worried than the bankers. They were torn between their desire for expanded powers and the wish not to seem either overly meddling or insensitive to moral hazard. Geithner insisted in testimony to the Senate that the Fed only lent to “sound institutions,” though that hardly described Bear Stearns.31 But he, like Paulson and Bernanke, were concerned that their scope was too limited. The system should not be so fragile as to depend on ad hoc, extralegal improvisation.


pages: 363 words: 107,817

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

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

Furthermore, the implicit insurance the government has provided is likely to lead to an increase in the risky behaviour (due to moral hazard) that led to the crisis in the first place, setting the stage for an even bigger crisis in the future. Conversely, under the reformed system, banks would be allowed to fail. The government and central bank would be under no obligation to intervene in the market and in so doing validate risky behaviour. This will lower moral hazard, as banks will now face the full downside of their investment decisions. This should decrease their willingness to participate in asset price bubbles.

Due to the failure of certain banks in 2008-09, just £171 million of the £19.86 billion (less than 1%) was funded through levies, while the rest was provided by government (Financial Services Compensation Scheme, 2009). There are two main problems with deposit insurance. The first is that by being insured, customers will take little or no interest in the way that the bank lends and takes risks. This is known as ‘moral hazard’.3 In a system without deposit insurance, depositors would have a strong incentive to monitor their bank’s behaviour to ensure the bank does not act in a manner that may endanger its own solvency. For example, a depositor would be concerned with the types of loans their bank was making and the amount of capital their bank had (capital acts as a buffer, protecting depositors from losses when loans go bad).

In a recent paper, Hart and Zingales (2011) create a simple framework to analyse the effect of bank lending on inflation in the economy, asking the question: “Does a competitive banking sector generate the socially optimal amount of the means of payment? In this paper we show that the answer is no, even if we abstract from any moral hazard and asymmetry of information. In particular, we analyse the general equilibrium effects that the availability of money has on prices and identify two pecuniary externalities: more money increases the equilibrium price of the goods that those with the money buy; but it also increases the wealth of the agents supplying these goods and so the prices of the goods they buy.


pages: 108 words: 27,451

Magic Internet Money: A Book About Bitcoin by Jesse Berger

Alan Greenspan, barriers to entry, bitcoin, blockchain, Bretton Woods, Cambridge Analytica, capital controls, carbon footprint, correlation does not imply causation, cryptocurrency, diversification, diversified portfolio, Ethereum, ethereum blockchain, fiat currency, Firefox, forward guidance, Fractional reserve banking, George Gilder, inflation targeting, invisible hand, Johann Wolfgang von Goethe, liquidity trap, litecoin, low interest rates, Marshall McLuhan, Metcalfe’s law, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, Nixon shock, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, planned obsolescence, price mechanism, Ralph Waldo Emerson, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, Robert Metcalfe, Satoshi Nakamoto, the medium is the message, Vitalik Buterin

This ability to exert control over other people’s money is the ability to deny property rights, which only accentuates injustice since it breaks the golden rule. 10.5 Moral Hazard “With great power comes great responsibility.” Stan Lee, Spiderman The residual effects of the Global Financial Crisis have scarred the psyche of a generation by dramatically exposing them to fiat money’s most dangerous fault – moral hazard. In economics, moral hazard is the detachment of cost from risk. When the crisis struck, global central banks used their privileged powers to conjure hundreds of billions of dollars from thin air in order to purchase undesirable assets bound for the scrap yard of financial history.

3.5 Fiat Functionality 3.6 Bitcoin on Point 3.7 Bitcoin Functionality Chapter 4: Growth 4.1 The Root of All Growth 4.2 The Value of Price 4.3 Time Is Money 4.4 Calculated Risk 4.5 Divestment Advice Chapter 5: Innovation 5.1 Evolution & Revolution 5.2 The Smart Money 5.3 Blockchain 101 Chapter 6: Resilience 6.1 An Unstoppable Force 6.2 Teamwork Makes the Dream Work 6.3 An Immovable Object 6.4 Harder, Better, Faster, Stronger Chapter 7: Scarcity 7.1 Limited Edition 7.2 $€¥£: A Sea of Fiat 7.3 Setting a Precedent 7.4 Pushing Limits 7.5 Making a Statement 7.6 No Second Chance for First Impressions Chapter 8: Competition 8.1 A New Frontier 8.2 Bitcoin Versus Fiat 8.3 Bitcoin Versus Gold 8.4 Bitcoin Versus Crypto 8.5 Bitcoin Versus Forks 8.6 Bitcoin Versus Stablecoins Chapter 9: Governance 9.1 Fair Is Rare 9.2 Tilted 9.3 Balanced 9.4 Ground Rules 9.5 Lead by Example Chapter 10: Freedom 10.1 The Golden Rule 10.2 The Dependency Trap 10.3 Home of the Brave 10.4 Capital Control 10.5 Moral Hazard 10.6 Amoral Safeguard 10.7 Unchained Chapter 11: Drawbacks 11.1 Mind the Gap 11.2 Ease of Use 11.3 Speed & Scale 11.4 Full Custody 11.5 Dark Mode 11.6 Mining 11.7 On Apathy & Atlas 11.8 Upset the Setup Chapter 12: Outlook 12.1 Monopoly Money 12.2 The Debtor’s Dilemma 12.3 From Sapling to Sequoia 12.4 Forward Guidance 12.5 The Bottom Line Resources Endnotes Key Terms Acknowledgments What Is Money?

This initial instance of Bitcoin is known as the “Genesis block.” Within the Genesis block, Satoshi embedded the following message: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” Here, Satoshi commemorated the network’s launch by highlighting a timely concern about the moral hazards inherent in our global monetary and banking systems, which were, and still are, on the brink of fallibility. This message is relevant to Bitcoin because it was specifically developed as a systematic upgrade – to be a principled monetary alternative for the 21st century and beyond. In late 2010, almost 2 years after its launch, Satoshi stopped communicating publicly about Bitcoin in chat forums, and also stopped contributing to ongoing software development.


pages: 239 words: 69,496

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return by Mihir Desai

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, AOL-Time Warner, assortative mating, Benoit Mandelbrot, book value, Brownian motion, capital asset pricing model, Carl Icahn, carried interest, Charles Lindbergh, collective bargaining, corporate governance, corporate raider, discounted cash flows, diversified portfolio, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, follow your passion, George Akerlof, Gordon Gekko, greed is good, housing crisis, income inequality, information asymmetry, Isaac Newton, Jony Ive, Kenneth Rogoff, longitudinal study, Louis Bachelier, low interest rates, Monty Hall problem, moral hazard, Myron Scholes, new economy, out of africa, Paul Samuelson, Pierre-Simon Laplace, principal–agent problem, Ralph Waldo Emerson, random walk, risk/return, Robert Shiller, Ronald Coase, short squeeze, Silicon Valley, Steve Jobs, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, tontine, transaction costs, vertical integration, zero-sum game

A selection of the most important fundamental work for the ideas of adverse selection and moral hazard includes Arrow, Kenneth J. “Uncertainty and the Welfare Economics of Medical Care.” American Economic Review 53, no. 5 (June 1963): 941–73; Pauly, Mark V. “The Economics of Moral Hazard: Comment.” American Economic Review, part 1, 58, no. 3 (June 1968): 531–37; Arrow, Kenneth J. “The Economics of Moral Hazard: Further Comment.” American Economic Review, part 1, 58, no. 3 (June 1968): 537–39; Akerlof, George A. “The Market for Lemons: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics 84, no. 3 (August 1970): 488–500; Holmstrom, Bengt. “Moral Hazard and Observability.”

That Simpsons plotline provides a great example of how the presence of insurance can create an incentive to alter your behavior, a manifestation of what’s known as moral hazard. The example isn’t perfect, since usually the insured person takes more risk because of the insurance, as opposed to trying to kill people because of insurance—but you get the idea. Insurance and safety nets of all kinds can lead to more risk-taking, and insurers have to think through that behavioral response in pricing insurance. For more on this, just stream that classic film noir Double Indemnity and think about Barbara Stanwyck’s character—that’s serious moral hazard. Given the importance of adverse selection and moral hazard, what are the best mechanisms for dealing with them?

Ensuring that insurance pools aren’t susceptible to people advantageously selecting into policies is what national mandates to buy insurance and employer-provided insurance are all about. Similarly, deductibles make sure that individuals aren’t overusing healthcare because they’re insured. But what organization is best suited to pool risk and counter the effects of moral hazard and adverse selection? It should be one where membership isn’t a choice, so that adverse selection isn’t operating, and one where you can closely monitor each other’s behavior to make sure moral hazard doesn’t work against you. Well, of course, that’s the family. You don’t get to choose your family, so that takes care of adverse selection. And families provide the intimacy for making sure behavior isn’t changing to take advantage of the insurance.


The Limits of the Market: The Pendulum Between Government and Market by Paul de Grauwe, Anna Asbury

Alan Greenspan, banking crisis, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, conceptual framework, crony capitalism, Easter island, Erik Brynjolfsson, eurozone crisis, Honoré de Balzac, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kitchen Debate, means of production, Money creation, moral hazard, Paul Samuelson, price discrimination, price mechanism, profit motive, Robert Gordon, Robert Solow, Ronald Coase, Simon Kuznets, The Nature of the Firm, The Rise and Fall of American Growth, too big to fail, transaction costs, trickle-down economics, ultimatum game, very high income

In recent decades social security in many European countries has run into this problem of moral hazard. The perception that many people benefit from the system at the expense of those who work undermines support from society for social security. This allows politicians to paint themselves as the ones who will combat ‘social welfare fraud’.  INTERNAL LIMITS OF GOVERNMENTS It is clear that the problem of moral hazard must be tackled. If it is not, then the system will be rejected by society. Some countries, particularly the Scandinavian countries, have succeeded relatively well in keeping moral hazard under control. They achieve this through a policy of activation of the unemployed, encouraging and helping them to re-enter the job market.

Large banks profit from it because they are so big that the government cannot allow them to fail as a result of the crisis. That would damage the economy too badly, because many people would be pulled into bankruptcy. Large banks are too big to fail and they know it. In fact governments provide these banks with a guarantee that they will not go bankrupt. This leads to what economists call ‘moral hazard’. A large bank which enjoys implicit government insurance will therefore take  THE L IMI TS OF TH E MAR KET more risks. These high risks lead to large profits when everything is going well, and when things go badly, governments step in and the taxpayer must cover the losses. Perversely enough, the bank’s profits are privatized and its losses are nationalized.

If people are affected by a calamity and are unable to perform, leaving them excluded, this does not disturb the market equilibrium. The market system continues, as if nothing has happened. That clashes with our sense of fairness. This is the fundamental reason why social security exists. But social security systems can in turn come up against their limits. Social security, like any insurance mechanism, leads to moral hazard,  THE L IMI TS OF TH E MAR KET by which economists mean the following. Whenever we insure ourselves against a particular risk, our vigilance with respect to that risk will be reduced. If we take out insurance against theft, we might neglect to instal the latest security technology in our homes.


pages: 454 words: 134,482

Money Free and Unfree by George A. Selgin

Alan Greenspan, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, centralized clearinghouse, Charles Lindbergh, credit crunch, Credit Default Swap, crony capitalism, disintermediation, Dutch auction, fear of failure, fiat currency, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, foreign exchange controls, Fractional reserve banking, German hyperinflation, Glass-Steagall Act, Hyman Minsky, incomplete markets, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, large denomination, liquidity trap, Long Term Capital Management, low interest rates, market microstructure, Money creation, money market fund, moral hazard, Network effects, Northern Rock, oil shock, Paul Samuelson, Phillips curve, plutocrats, price stability, profit maximization, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, Robert Gordon, Robert Solow, Savings and loan crisis, savings glut, seigniorage, special drawing rights, The Great Moderation, the payments system, too big to fail, transaction costs, Tyler Cowen, unorthodox policies, vertical integration, Y2K

But the most important costs that must be set against any possible short-run gains from Fed departures from classical LOLR doctrine consist of the moral hazard problems caused by such departures, including the problem of zombie institutions gambling for recovery. As Kaufman (2000: 237) puts it, “there is little more costly and disruptive to the economy than liquid insolvent banks that are permitted to continue to operate.” It is a common misconception to think that imposing losses on management and shareholders, while shielding counterparties and creditors, is enough to contain moral hazard. So long as bank creditors can expect high returns on the upside, with implicit government guarantees against losses on the downside, they will lend too cheaply to risky, poorly diversified banks, making overly high leverage (thin capital) an attractive strategy.

To contain this threat, the Federal Reserve provided secured loans to AIG. The trouble with such a mingling of Bagehotian and too-big-to-fail lending criteria is, as we have seen, that it raises a moral hazard. Bernanke himself was fully aware of the danger. “Some particularly thorny issues,” he observed after the Bear rescue, are raised by the existence of financial institutions that may be perceived as “too big to fail” and the moral hazard issues that may arise when governments intervene in a financial crisis. [Bear’s rescue was] necessary and justified under the circumstances that prevailed at that time. However, those events also have consequences that must be addressed.

Deposit insurance and central bank loans have increasingly had these effects in recent years, particularly in the thrift industry where hundreds of bankrupt “zombie institutions” have been kept afloat at taxpayers’ expense instead of being allowed to succumb to the Darwinian forces of the market. (Thrifts received their first direct Federal Reserve support on February 23, 1989.) The ill effects of government deposit insurance are, as is well known, due to its lack of risk-adjusted premiums. This leads to moral hazard whereby the insured firms pursue risks that they would not pursue in an uninsured state.7 Depositors, in turn, no longer feel any need to be concerned about the safety of particular depository institutions, and are tempted to supply funds to wherever rates are highest. According to J. Huston McCulloch (1986: 82), thanks to federal deposit insurance, banks and thrifts have engaged with impunity in all manner of excessive risks—foreign exchange speculation (Franklin National), speculative energy loans (Penn Square), inadequately investigated loans (Continental Illinois), insider loans (the Butcher banks), uncollectable Third World loans (almost every top ten bank) and so forth.


pages: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

Alan Greenspan, Alvin Roth, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, benefit corporation, Bernie Madoff, buy and hold, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, democratizing finance, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial engineering, financial innovation, financial thriller, fixed income, full employment, fundamental attribution error, George Akerlof, Great Leap Forward, Ida Tarbell, income inequality, information asymmetry, invisible hand, John Bogle, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, Right to Buy, road to serfdom, Robert Shiller, Ronald Reagan, selection bias, self-driving car, shareholder value, Sharpe ratio, short selling, Simon Kuznets, Skype, social contagion, Steven Pinker, tail risk, telemarketer, Thales and the olive presses, Thales of Miletus, The Market for Lemons, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, zero-sum game, Zipcar

Some CEOs are, and always will be, worth a great deal to their rms. On the other hand, the group did believe that regulation of the structure of CEO compensation is called for.5 Moral Hazard and Deferred Compensation There is a reason for the government to intervene in the process of determining executive salaries: to mitigate a speci c moral hazard that seems to have played a substantial role in causing the nancial crisis that began in 2007—at least for big and so-called systemically important rms. This moral hazard arises because the CEOs and other top o cers of such key rms have incentives to take extraordinary risks. They believe that their companies are too big to be allowed to fail.

This distinction must in part have to do with the fact that bankers typically stay out of the most volatile, headline-grabbing markets. But perhaps too it is because bankers, in contrast to hedge fund managers and the like, are following a long and time-honored tradition, extending back hundreds of years, which has evolved to solve certain problems—including liquidity, moral hazard and selection bias, and transaction service problems—to the satisfaction of most people most of the time. The anger toward bankers takes a very di erent form. It seems to be anger at their power and presumption, at their single-minded pursuit of money. And the anger ares up whenever there is a banking crisis and the governments of the world come to the rescue of these wealthy interests.

In the United States, explicit reserve requirements date back to the early days of the Federal Reserve, in 1917.2 Capital requirements for banks began to be enforced by the United States in 1982.3 International capital agreements began with the Basel Accord in 1988, and they were reformed by the Basel Committee in response to the nancial crisis that began in 2007, to avoid more government bailouts in future crises. Bank regulation becomes more and more complex as the years go by, as does the banking business itself. In addition to providing liquidity, banks address another problem that individuals seeking a return on their investments face if they try to invest directly—a moral hazard problem. If individuals invest directly in companies, by lending money to them or buying their securities, they may in e ect be robbed by the people with whom they invest. There are numerous ways for the managers of a business to funnel money out of the company and into the hands of friends, thereby in e ect stealing money from their investors.


pages: 920 words: 233,102

Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State by Paul Tucker

"Friedman doctrine" OR "shareholder theory", Alan Greenspan, Andrei Shleifer, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, Brexit referendum, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, conceptual framework, corporate governance, diversified portfolio, electricity market, Fall of the Berlin Wall, financial innovation, financial intermediation, financial repression, first-past-the-post, floating exchange rates, forensic accounting, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, Greenspan put, incomplete markets, inflation targeting, information asymmetry, invisible hand, iterative process, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, liberal capitalism, light touch regulation, Long Term Capital Management, low interest rates, means of production, Money creation, money market fund, Mont Pelerin Society, moral hazard, Northern Rock, operational security, Pareto efficiency, Paul Samuelson, price mechanism, price stability, principal–agent problem, profit maximization, public intellectual, quantitative easing, regulatory arbitrage, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, road to serfdom, Robert Bork, Ronald Coase, seigniorage, short selling, Social Responsibility of Business Is to Increase Its Profits, stochastic process, subprime mortgage crisis, tail risk, The Chicago School, The Great Moderation, The Market for Lemons, the payments system, too big to fail, transaction costs, Vilfredo Pareto, Washington Consensus, yield curve, zero-coupon bond, zero-sum game

The argument against such a role rests on the possibility of conflicts of interest. Moral Hazard from Insuring Liquidity and Macrostability People, businesses, and financial intermediaries plausibly take more risk than otherwise, including taking on too much debt, due to central banks’ role as the LOLR to the financial system and as the authority that seeks to smooth the economy’s ups and downs.24 While this has attracted attention since talk of the “Greenspan put” during the 1990s, it is not obvious that it should knock central banks out of contention for formal regulatory and supervisory responsibilities. After all, these various moral hazard risks are no smaller when a separate body is the regulator.

In fact, however, the Fed has pretty much the same political insulation in supervision and regulation as it does in monetary policy, and a lot closer to that than to, say, the EPA or SEC: job security, budgetary autonomy, instrument autonomy (chapter 4). 22 Tucker, “Resolution of Financial Institutions.” 23 In the UK, confidence that information would flow smoothly was strongly, but naively and damagingly, asserted (Roll et al., Independent and Accountable, pp. 44 and 68). 24 Miller, Weller, and Zhang, “Moral Hazard,” and Farhi and Tirole, “Collective Moral Hazard.” 25 Cecchetti, “Financial Supervisors.” Also, Copelovitch and Singer, “Financial Regulation,” which appeals to a structural explanation from Dewatripont, Jewitt, and Tirole, “Economics of Career Concerns.” The central difference with this book is that, under the Multiple-Mission Constraints, each mission is delegated to a distinct committee, whereas Dewatripont et al. have a unitary policy maker. 26 Hood, “Public Management.” 27 Bagehot, Lombard Street. 28 On a broad point of substance, the constraints on banking would take the following general shape: X percent of the face value of short-term liabilities (S) to be “covered” by holdings of liquid assets, discounted to the value attributed to them by the central bank (d.LA); residual assets ((1-d).LA plus assets ineligible at the central bank) to be funded in prescribed minimum proportions by common equity (K) and debt that can be converted into equity without disruption (known as bail in-able debt, B), plus any “uncovered” short-term liabilities ((1-x).S).

It should be to avoid or mitigate the social costs that flow from illiquid but fundamentally sound intermediaries failing in a disorderly way or rationing credit and other services (in order to serve the intermediaries’ private interest in staying alive). Once under such an obligation, as a general matter central banks would lose their discretion as to whether to activate their LOLR powers depending on their particular view of moral hazard costs. Instead, they would stand accountable for their assessment of the facts they confronted and the terms set on any assistance (Design Precept 4). They would also be incentivized to combat moral hazard through the ex ante terms and conditions of their lending facilities and through the regulatory regime. (As sketched in chapter 20’s discussion of the Money-Credit Constitution, those could be linked if runnable liabilities had to be covered by assets eligible for discount at the central bank.)


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

Abraham Wald, Alan Greenspan, Albert Einstein, An Inconvenient Truth, Andrei Shleifer, anti-communist, AOL-Time Warner, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, book value, Bretton Woods, British Empire, business cycle, capital asset pricing model, carbon tax, Carl Icahn, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Garrett Hardin, George Akerlof, Glass-Steagall Act, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Nixon triggered the end of the Bretton Woods system, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, Ponzi scheme, precautionary principle, price discrimination, price stability, principal–agent problem, profit maximization, proprietary trading, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, subprime mortgage crisis, tail risk, Tax Reform Act of 1986, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, Two Sigma, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

“Insurance removes the incentive on the part of individuals, patients, and physicians to shop around for better prices for hospitalization and surgical care,” Arrow noted. Following Arrow’s example, economists now refer to the phenomenon of insurance changing people’s behavior as “moral hazard.” Ultimately, this is another problem of hidden information: insurers can’t fully monitor the behavior of their policyholders, so they try to influence it in other ways. In the cases of hurricane and earthquake insurance, moral hazard is a minor concern, because the policyholders can’t affect the probability of a payout. In other areas, they can. Motorists with car insurance tend to drive less carefully and leave their vehicles unattended, which means they are more likely to crash and have their vehicle stolen; drivers with seat belts tend to drive faster; and property owners with fire insurance are less apt to install fire alarms and fire extinguishers.

Even before the development of alphabet soup finance, the presence of deposit insurance and implicit government guarantees meant that banks, especially the biggest ones, were apt to take too many risks—this is the issue of moral hazard. But the combination of securitization, credit insurance, and reforms to the regulatory structure greatly accentuated this problem. “[T]here is an immutable law of insurance that says that, while hedging can reduce the risk to an individual party taking out the insurance, it increases the risk for the system as a whole because of moral hazard,” John Plender, a veteran commentator for the Financial Times, noted in October 2006. “That is, the mere existence of insurance means people become less risk averse.

They also insist on precertification for visits to specialists, limit the choice of doctors whom patients can see, and investigate suspect claims. But such measures add to the insurers’ already substantial administrative costs, and they haven’t proved sufficient to keep down costs. One way to banish moral hazard would be to do away with health insurance, but that would also eliminate the benefits of risk sharing, which are substantial. Alternatively, insurers could refuse to pay for superfluous tests and treatments that don’t offer much prospect of curing the patient. In a competitive environment, however, holding the line is difficult.


pages: 436 words: 76

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

Alan Greenspan, Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, behavioural economics, Berlin Wall, Big bang: deregulation of the City of London, Bletchley Park, business cycle, California gold rush, Charles Babbage, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Dr. Strangelove, Dutch auction, Edward Lloyd's coffeehouse, electricity market, equity premium, equity risk premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, Fairchild Semiconductor, financial innovation, flying shuttle, Ford Model T, Francis Fukuyama: the end of history, George Akerlof, George Gilder, Goodhart's law, Great Leap Forward, greed is good, Gunnar Myrdal, haute couture, Helicobacter pylori, illegal immigration, income inequality, industrial cluster, information asymmetry, intangible asset, invention of the telephone, invention of the wheel, invisible hand, John Meriwether, John Nash: game theory, John von Neumann, junk bonds, Kenneth Arrow, Kevin Kelly, knowledge economy, Larry Ellison, light touch regulation, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Michael Milken, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, Pareto efficiency, Paul Samuelson, pets.com, Phillips curve, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, proprietary trading, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, Right to Buy, risk tolerance, road to serfdom, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, Stuart Kauffman, telemarketer, The Chicago School, The Market for Lemons, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Vilfredo Pareto, Washington Consensus, women in the workforce, work culture , yield curve, yield management

The only solution to the potential information asymmetry is to stop such information being collected at all-which would be impossible even if it were desirable. In fifty years, private medical and life insurance may { 240} John Kay be as difficult to obtain as divorce and unemployment insurance today, and for the same reasons. Moral Hazard Most risks in our environment depend on the actions we take. If we have financial protection against risk, we will expose ourselves to more risks. This is the problem of moral hazard. 12 People do not allow their houses to burn down because they have fire insurance. Young women do not set out to become pregnant because there are social benefits for single mothers. But their behavior is adaptive.

When those you insure can influence the risks you cover, you must supervise them. Social Insurance of Personal Risks ••••••••••••••••••••••••••••••••••••• When people can opt out, adverse selection is a problem. If you can't easily watch what they're doing, moral hazard is a problem. The combination of adverse selection and moral hazard means that risks are best managed by groups that have other common bonds: typically families, communities, workplaces, and nations. The management of everyday risk is best and principally undertaken through social institutions. Purely economic agencies such as insurance companies and securities markets play only a minor role.

The term social insurance originated in Germany in the late nineteenth century, 18 as government came to take over the insurance functions of voluntary organizations such as mutual societies and trade unions and to extend more generally the kinds ofbenefit they had provided to employees. This organized mutual sharing of risks is today part of the economic structure of most West European states. Government is well-placed to reduce adverse selection, because it can compel participation, but is less effective at reducing moral hazard than the social pressures of a local community. Formal social insurance schemes address the moral hazard problem by limiting the generosity of the benefits they provide, the time period for which the benefits are paid, and attaching conditions-such as tests of genuineness of the search for work-to their benefits. Business Risk Some economic risks are inescapable.


pages: 320 words: 97,509

Doctored: The Disillusionment of an American Physician by Sandeep Jauhar

Affordable Care Act / Obamacare, delayed gratification, illegal immigration, income inequality, independent contractor, Induced demand, medical malpractice, moral hazard, obamacare, PalmPilot, profit motive, randomized controlled trial, source of truth, stem cell, The Wealth of Nations by Adam Smith, Yogi Berra

When people complain that their rising insurance premiums are funding others’ irresponsible behavior, they are complaining about moral hazard. When patients with low-deductibility insurance go to the emergency room for a hangnail, they are succumbing to moral hazard. When a nurse in the ICU criticizes a family for refusing to authorize a DNR order (“They would never do this if they had to pay for it”), she is talking about moral hazard. The moral hazard hypothesis was put to the test in the 1970s with the RAND Health Insurance Experiment. For a decade it followed eight thousand people who had been randomly assigned to one of five types of health insurance plan: an HMO-style group cooperative or a traditional plan that covered 100 percent, 95 percent, 50 percent, or 25 percent of costs.

Of course, many forces, including new and expensive technology, the aging of the population, and the rise of chronic diseases, are behind increasing imaging costs. But moral hazard undoubtedly plays a role. Managed care, with its reliance on high deductibles and capitation, in which physicians are paid a set amount per assigned patient, whether or not that patient seeks care, came of age with the idea of controlling moral hazard. In the 1970s many insurers adopted co-payments to increase the price of medical care to consumers in an effort to reduce inefficient spending. In the 1980s and 1990s, economists promoted fixed payments and utilization review, in which payers approve or deny requests for medical services, to further reduce moral hazard. The managed care system that we know today is largely a product of this theory.

In 1867 the Aetna Guide to Fire Insurance introduced the concept of moral hazard into actuarial science. The publication warned that generous insurance policies could make some people careless about preventing fires. Protected in part from the consequences of their actions, those people were more likely to engage in risky behavior, like not clearing their yards of brush or leaving their houses without adequate ventilation. The guide made a revolutionary and counterintuitive point: insurance in some cases can increase risk. Moral hazard undoubtedly plays a role in health care, too. When people complain that their rising insurance premiums are funding others’ irresponsible behavior, they are complaining about moral hazard.


pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

Alan Greenspan, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, 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, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Hyman Minsky, inflation targeting, invention of writing, invisible hand, Irish bank strikes, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, land bank, Michael Milken, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, Paul Volcker talking about ATMs, plutocrats, private military company, proprietary trading, public intellectual, Republic of Letters, Richard Feynman, Robert Shiller, Savings and loan crisis, Scientific racism, scientific worldview, seigniorage, Silicon Valley, smart transportation, South Sea Bubble, supply-chain management, The Wealth of Nations by Adam Smith, too big to fail

It seemed inconceivable that the regulators would let it go: everyone knew that it was “too big to fail.” Yet the sanctimonious talk of the dangers of moral hazard emanating from the central bank was far from reassuring. And then, taking everyone by surprise, it happened. There was a full-blown run, and the central bank let it fail. All hell broke loose: a panic the like of which hadn’t been seen for decades. As financial markets tanked, credit seized up, and the economy capsized, moral hazard was suddenly the last thing the central bankers were worrying about. The policy-makers realised that the time had come to run the printing press at full tilt and bail out the financial sector before it disintegrated completely.

“Financial stability,” warned Daniel Tarullo—the leading authority on bank regulation on the Board of Governors of the Federal Reserve—in June 2012, “is, in important ways, endogenous to the financial system, or at least the kind of financial system that has developed in recent decades.”10 Moral hazard is hard-wired into the system. This is why attempting to mitigate it by tinkering with capital ratios or liquidity requirements would be a Sisyphean task. So long as the nature of banking is to lend long-term by borrowing short-term, and take credit risk whilst promising none, the boulder of moral hazard would forever be tumbling back to the bottom of the hill just as the regulators think they have it fixed. What is needed is reform targeted at the fundamental structure of the banking system, rather than at the behaviour of the bankers within it.

It opened with a chilling warning: “[c]harity is the national error of Englishmen.”9 There was no question that the impending Irish famine was an economic disaster and a human tragedy. But simply sending aid was absolutely the wrong way to help. It would violate two central principles of economic theory. The first was the need to avoid moral hazard. Send aid, and one might alleviate the immediate problem—but at the cost of reducing the Irish to a state of permanent dependency. The second was the hallowed principle of non-intervention in the operation of the market. Adam Smith had proved that it was allowing private self-interest to operate as freely as possible that most efficiently achieves the social good.


pages: 424 words: 121,425

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy by Mehrsa Baradaran

access to a mobile phone, affirmative action, Alan Greenspan, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Bear Stearns, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, cashless society, credit crunch, David Graeber, disintermediation, disruptive innovation, diversification, failed state, fiat currency, financial innovation, financial intermediation, Glass-Steagall Act, Goldman Sachs: Vampire Squid, housing crisis, income inequality, Internet Archive, invisible hand, junk bonds, Kickstarter, low interest rates, M-Pesa, McMansion, Michael Milken, microcredit, mobile money, Money creation, moral hazard, mortgage debt, new economy, Own Your Own Home, Paul Volcker talking about ATMs, payday loans, peer-to-peer lending, price discrimination, profit maximization, profit motive, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, Ronald Reagan: Tear down this wall, Savings and loan crisis, savings glut, subprime mortgage crisis, the built environment, the payments system, too big to fail, trade route, transaction costs, unbanked and underbanked, underbanked, union organizing, W. E. B. Du Bois, white flight, working poor

The argument was that banks would not be incentivized to take risks because if they did, the market would punish them, and the FDIC would facilitate their failure, thus eliminating any concerns about moral hazard. Obviously, this was not the case twenty years later when government bailouts abruptly cut off market discipline. In fact, market discipline for banks, if it exists at all, is not robust because of the moral hazard introduced by deposit insurance. And what of the fears of concentrated power that so consumed Jefferson, Brandeis, and Roosevelt? The FDIC was not too worried: “There will [not] be fewer banks or less competition in any given market.… While concentrations of political power may be undesirable, it is not clear that large organizations or highly concentrated industries are able to wield too much influence over government.

And so, postal banking’s popularity increased. Many saw it as a way to respond to the constant banking crises of the time and further, viewed it to be a better alternative than federal deposit insurance because there was less moral hazard involved (insurance protection tends to make banks take more risks). The government would fund and oversee postal banks to minimize the chance of moral hazard. And interestingly, it was the Republicans who supported a broad federal banking system rather than a private bank-funded insurance scheme. During the 1908 presidential election, postal banking became a major issue.

Insurance removes the incentive for customers to police a bank. It can also remove the incentive for banks to police themselves because they do not bear the full or even the most serious consequences of their actions. Removing the natural tendencies of the market to notice and punish bad choices creates a moral hazard that may result in well-funded cats and other undetected market risks. In the United States, only federal deposit insurance has been effective at stabilizing banks. State and private insurance funds have been attempted and have failed because to be effective at deterring runs, an insurance system must be basically unlimited.


pages: 389 words: 98,487

The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor, and Why You Can Never Buy a Decent Used Car by Tim Harford

Alan Greenspan, Albert Einstein, barriers to entry, Berlin Wall, business cycle, collective bargaining, congestion charging, Corn Laws, David Ricardo: comparative advantage, decarbonisation, Deng Xiaoping, Fall of the Berlin Wall, George Akerlof, Great Leap Forward, household responsibility system, information asymmetry, invention of movable type, John Nash: game theory, John von Neumann, Kenneth Arrow, Kickstarter, market design, Martin Wolf, moral hazard, new economy, Pearl River Delta, price discrimination, Productivity paradox, race to the bottom, random walk, rent-seeking, Robert Gordon, Robert Shiller, Ronald Reagan, sealed-bid auction, second-price auction, second-price sealed-bid, Shenzhen special economic zone , Shenzhen was a fishing village, special economic zone, spectrum auction, The Market for Lemons, Thomas Malthus, trade liberalization, Vickrey auction

If I lose my job and the government pays unemployment benefit, I may not hurry to find a new job quite as quickly as I would if I had no income whatso-ever. If the money in my checking account is insured against a bank failure, why bother to check that the bank is financially sound? Moral hazard is an inevitable problem in the real economy. While it is impossible for insurance companies (or anyone else) • 123 • T H E U N D E R C O V E R E C O N O M I S T to avoid moral hazard altogether, they can take steps to reduce it. For example, they do not offer insurance against being fired or becoming pregnant, which is a shame, because it would be great to have that kind of insurance.

There are many people who would like to leave their jobs and many others who would like to have children, and such people would be particularly eager to buy an insurance policy that would pay them handsomely for putting their plans into action. As a result, moral hazard destroys the market for private unemployment insurance. On the other hand, public unemployment insurance still exists, in spite of moral hazard. It is not polite to say so, but it is obvious that paying people to be unemployed encourages unemployment. Yet if a government scrapped unemployment benefit, there would still be jobless people, and supporting the jobless is something that every civilized society should do.

The truth is that we have a trade-off: it is bad to encourage unemployment but good to support those without incomes. Both governments and private insurers will try to protect themselves against moral hazard. One of the most common ways insurance companies do this is by modifying the insurance policy to provide incomplete insurance, in the form of a deductible. If my car insurance deductible is $200, the fear of losing that money probably won’t persuade me to take extravagant safety precautions, but it should be enough to make me check that my car is locked. Another way insurance companies can fight moral hazard is by gaining access to the inside information. Health insurers will want to know whether I am a smoker before they set my premiums.


pages: 479 words: 113,510

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

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Sanders, Black Monday: stock market crash in 1987, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, junk bonds, liquidity trap, London Whale, Long Term Capital Management, low interest rates, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, Navinder Sarao, negative equity, new economy, Northern Rock, obamacare, Phillips curve, price stability, proprietary trading, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, stock buybacks, tail risk, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

He had proven his mettle as a “big swinging dick” by insisting that the Fed sweeten the pot by providing JPMC with downside protection to cover the risk of the unknown. The rescue’s fallout for the Fed was swift and unflattering. Congress and the press blasted Bernanke, Geithner, and Paulson for inflaming “moral hazard.” The term “moral hazard” refers to the problem created when one party (an investment bank) engages in risky behavior, knowing that it will be rescued by a second party (the Federal Reserve or the taxpayers), which will incur the cost. Paulson fully grasped what was at stake. During the negotiations over Bear’s salvage, he insisted that the rescue had to hurt.

Bernanke would trim the sails to right the foundering ship. I disagreed. The demise of the Bear was a flashing red light that shouted “DANGER.” My colleagues rolled their eyes. Rosenblum treated me with a new respect. The chain of events was playing out as I had predicted. He and I began collaborating on a paper on moral hazard. It would make Rosenblum no fans at the Board of Governors. The bailout both relieved and alarmed the financial press. The Economist wrote that the Fed was “taking the unprecedented (and, some say, disturbing) step of financing up to $30 billion of Bear’s weakest assets. This could cost the central bank several billion dollars if those assets fall in value.”

There he would have seen the arrogant “Master of the Universe” so reckless with other people’s money that he ignored reality. As Lehman’s stock tanked, Fuld began peppering Paulson with phone calls, trying to find an exit route. The treasury secretary wasn’t helpful. Bail out the Gorilla? Paulson recognized he was dealing with moral hazard in spades. It again seemed as if Dimon would come to the rescue. On September 9, at the Fed’s urging, JPMC agreed to loan Lehman operating funds; without the deal, Lehman would have had to close its doors the next day. But Lehman had to come up with $5 billion in extra collateral. It couldn’t.


pages: 432 words: 127,985

The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry by William K. Black

accounting loophole / creative accounting, affirmative action, Alan Greenspan, Andrei Shleifer, Black Monday: stock market crash in 1987, book value, business climate, cognitive dissonance, corporate governance, corporate raider, Donald Trump, fear of failure, financial deregulation, friendly fire, George Akerlof, hiring and firing, junk bonds, margin call, market bubble, Michael Milken, money market fund, moral hazard, offshore financial centre, Ponzi scheme, race to the bottom, Ronald Reagan, Savings and loan crisis, short selling, The Market for Lemons, transaction costs

They also concentrate in investments best suited for accounting fraud. That triple concentration means that waves of control fraud will create, inflate, and extend bubbles. MORAL HAZARD Moral hazard is the temptation to seek gain by engaging in abusive, destructive behavior, either fraud or excessive risk taking. Failing firms expose their owners to moral hazard. This is not unique to S&Ls; it is in the nature of corporations. Moral hazard arises when gains and losses are asymmetrical. A company with $100 million in assets and $101 million in liabilities is insolvent. If it is liquidated (sells its assets), the stockholders will get nothing because they are paid only after all the creditors are paid in full.

If the corporation makes an extremely risky investment and it fails, the loss is borne entirely by the creditors. If the investment is a spectacular success, the gain goes overwhelmingly to the shareholders. The shareholders have a perverse incentive to take unduly large risks rather than to make the most productive investments. The examples of moral hazard I have used involve unduly risky behavior. The theory, however, is not limited to honest risk taking. Moral hazard theory also explains why failing firms have an incentive to engage in reactive control fraud (White 1991, 41). Indeed, since S&L control fraud was a sure thing (it was certain to produce, for a time, record profits), reactive control fraud was a better option than an ultra-high-risk gamble.

Instead, it endorsed absurd accounting abuses like “loan loss deferral” (which meant not recognizing losses currently) as purportedly superior accounting treatments under economic and accounting theory.6 The task force also encouraged fast growth and interest-rate risk in a get-rich-quick scheme called “risk-controlled arbitrage” (RCA).7 Second, the design and implementation of the cover-up guaranteed a disaster. Moral hazard theory unambiguously predicts that if you greatly weaken restraints on abuse at a time of mass, intense moral hazard, you will suffer severe abuses. Had you asked Richard Pratt, when he was still a graduate student, to write a paper on the effect of removing restraints at a time of mass insolvency, I am confident that you would have received a sound analysis predicting disaster.


pages: 288 words: 64,771

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality by Brink Lindsey

Airbnb, Asian financial crisis, bank run, barriers to entry, Bernie Sanders, Build a better mousetrap, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, Cass Sunstein, collective bargaining, creative destruction, Credit Default Swap, crony capitalism, Daniel Kahneman / Amos Tversky, David Brooks, diversified portfolio, Donald Trump, Edward Glaeser, endogenous growth, experimental economics, experimental subject, facts on the ground, financial engineering, financial innovation, financial intermediation, financial repression, hiring and firing, Home mortgage interest deduction, housing crisis, income inequality, informal economy, information asymmetry, intangible asset, inventory management, invisible hand, Jones Act, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, knowledge worker, labor-force participation, Long Term Capital Management, low skilled workers, Lyft, Mark Zuckerberg, market fundamentalism, mass immigration, mass incarceration, medical malpractice, Menlo Park, moral hazard, mortgage debt, Network effects, patent troll, plutocrats, principal–agent problem, regulatory arbitrage, rent control, rent-seeking, ride hailing / ride sharing, Robert Metcalfe, Robert Solow, Ronald Reagan, Savings and loan crisis, Silicon Valley, Silicon Valley ideology, smart cities, software patent, subscription business, tail risk, tech bro, too big to fail, total factor productivity, trade liberalization, tragedy of the anticommons, Tragedy of the Commons, transaction costs, tulip mania, Tyler Cowen, Uber and Lyft, uber lyft, Washington Consensus, white picket fence, winner-take-all economy, women in the workforce

Given the expectation that bailouts will again be forthcoming the next time a crisis hits, the riskiness of lending to highly leveraged institutions is much lower than it otherwise would be; thus, the interest rates that those institutions pay to their nominally uninsured creditors are kept artificially low. The perverse incentives created by these leverage subsidies are known as “moral hazard,” an expression that comes from the insurance industry to describe the reduced motivation to guard against risks that have been insured against. How moral hazard operates in the financial sector is widely misunderstood. The common picture is that if moral hazard is present, it must mean that financial sector executives are consciously making business decisions with an attitude of “heads I win, tails you lose.” In other words, they deliberately make investments they know are risky because they understand that they will make big profits if the investments pay off, and if they don’t, well that’s the government’s problem.

Far from seeing themselves as reckless, the unwitting architects of the financial crisis were highly confident that they were managing risks expertly and were shocked when the facts proved otherwise. Accordingly, it would seem that moral hazard wasn’t a major factor in explaining what went wrong. But in fact moral hazard was absolutely central to the story, and it is at the heart of why the financial sector remains a disaster waiting to happen. The main effect of moral hazard isn’t on the incentives facing the executives of financial institutions. Rather, the main effect is on depositors and other creditors. Because their risk of loss has been artificially reduced by the formal and informal safety net created by government, they do not respond as normal market actors would to the heightened risk of insolvency created by extreme leverage.

Upjohn Institute for Employment Research Policy Paper no. 2011-009, July 2011, http://research.upjohn.org/up_policypapers/9/. 2.Department of the Treasury Office of Economic Policy, Council of Economic Advisers, and Department of Labor, “Occupational Licensing: A Framework for Policymakers,” July 2015, pp. 19–20, https://www.whitehouse.gov/sites/default/files/docs/licensing_report_final_nonembargo.pdf. 3.Department of the Treasury Office of Economic Policy, Council of Economic Advisers, and Department of Labor, “Occupational Licensing: A Framework for Policymakers,” p. 7. 4.See Dick M. Carpenter II, Lisa Knepper, Angela C. Erickson, and John K. Ross, “License to Work: A National Study of Burdens from Occupational Licensing,” Institute for Justice, May 2012, https://www.ij.org/licensetowork. 5.See Carl Shapiro, “Investment, Moral Hazard, and Occupational Licensing,” Review of Economic Studies 53, no. 5 (1986): 843–62, http://www.jstor.org/stable/2297722. 6.See Adam B. Summers, “Occupational Licensing: Ranking the States and Exploring Alternatives,” Reason Foundation Policy Study no. 361, July 2007, http://reason.org/news/show/occupational-licensing-ranking. 7.See Carpenter et al., “License to Work.” 8.See Carpenter et al., “License to Work.” 9.See Morris M.


Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-border payments, currency peg, currency risk, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Glass-Steagall Act, Herman Kahn, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Japanese asset price bubble, joint-stock company, junk bonds, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Mary Meeker, Michael Milken, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, Suez canal 1869, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

He added: ‘If speculators could find unlimited credit, one can’t tell what crises would ensue.’8 The moral hazard dilemma is that policy measures undertaken to provide stability to the system during this crisis may encourage speculation during the next expansion by those who seek exceptionally high returns and who have become somewhat convinced that there is a strong likelihood that the government will adopt measures to prevent the economy from imploding – and so their losses on the downside will be limited. A ‘free lunch’ for the speculators today means that they are likely to be less prudent in the future. Hence the next several financial crises could be more severe. The moral hazard problem is a strong argument for non-intervention as a financial crisis develops, to reduce the likelihood and severity of future crises.

The traditional debate is between those who believe that the government should not intervene to save firms that are financially challenged; those who advance this view believe that if asset prices decline sufficiently sharply, the markets eventually will stabilize and investors who had been waiting on the sidelines will then buy the institutions that had lost most of their capital. Those who support this view subscribe to the moral hazard position that the next financial crisis will be more severe because the lenders would believe that they will be bailed out. The challenge to this view is that each of these crises is different, and that the economic costs of not stabilizing the system are severe. Moreover, the moral hazard view fails to distinguish between government intervention to stabilize a single failing firm, and intervention to stabilize a group of firms as a real estate bubble implodes.

The Italian literature calls the process the ‘salvage’ of banks and companies; the British in 1974–75 referred to saving the fringe banks as a ‘lifeboat’ operation. Issues related to a domestic lender of last resort are the focus of Chapter 11 – primarily whether there should be such a lender, who this lender should be and how it should operate. A key topic is ‘moral hazard’ – if investors are confident that they will be ‘bailed out’ by a lender of last resort, their self-reliance may be weakened. But on the other hand, the priority may be to stop the panic, to ‘save the system today’ despite the adverse effects on the incentives of investors. If there is a lender of last resort, however, whom should it save?


pages: 829 words: 187,394

The Price of Time: The Real Story of Interest by Edward Chancellor

"World Economic Forum" Davos, 3D printing, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, asset allocation, asset-backed security, assortative mating, autonomous vehicles, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Bernie Sanders, Big Tech, bitcoin, blockchain, bond market vigilante , bonus culture, book value, Bretton Woods, BRICs, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cashless society, cloud computing, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, commodity super cycle, computer age, coronavirus, corporate governance, COVID-19, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cryptocurrency, currency peg, currency risk, David Graeber, debt deflation, deglobalization, delayed gratification, Deng Xiaoping, Detroit bankruptcy, distributed ledger, diversified portfolio, Dogecoin, Donald Trump, double entry bookkeeping, Elon Musk, equity risk premium, Ethereum, ethereum blockchain, eurozone crisis, everywhere but in the productivity statistics, Extinction Rebellion, fiat currency, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, full employment, gig economy, Gini coefficient, Glass-Steagall Act, global reserve currency, global supply chain, Goodhart's law, Great Leap Forward, green new deal, Greenspan put, high net worth, high-speed rail, housing crisis, Hyman Minsky, implied volatility, income inequality, income per capita, inflation targeting, initial coin offering, intangible asset, Internet of things, inventory management, invisible hand, Japanese asset price bubble, Jean Tirole, Jeff Bezos, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Rogoff, land bank, large denomination, Les Trente Glorieuses, liquidity trap, lockdown, Long Term Capital Management, low interest rates, Lyft, manufacturing employment, margin call, Mark Spitznagel, market bubble, market clearing, market fundamentalism, Martin Wolf, mega-rich, megaproject, meme stock, Michael Milken, Minsky moment, Modern Monetary Theory, Mohammed Bouazizi, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, Northern Rock, offshore financial centre, operational security, Panopticon Jeremy Bentham, Paul Samuelson, payday loans, peer-to-peer lending, pensions crisis, Peter Thiel, Philip Mirowski, plutocrats, Ponzi scheme, price mechanism, price stability, quantitative easing, railway mania, reality distortion field, regulatory arbitrage, rent-seeking, reserve currency, ride hailing / ride sharing, risk free rate, risk tolerance, risk/return, road to serfdom, Robert Gordon, Robinhood: mobile stock trading app, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, Second Machine Age, secular stagnation, self-driving car, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, stock buybacks, subprime mortgage crisis, Suez canal 1869, tech billionaire, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tim Haywood, time value of money, too big to fail, total factor productivity, trickle-down economics, tulip mania, Tyler Cowen, Uber and Lyft, Uber for X, uber lyft, Walter Mischel, WeWork, When a measure becomes a target, yield curve

For instance, if car insurance is priced too cheaply, more bad drivers take to the roads leading to a rise in the number of car accidents. Subsidized home insurance encourages people to build on flood plains or move into hurricane-prone areas. In extremis, moral hazard might induce a policyholder to burn down his house so he can claim on the insurance. Moral hazard also occurs when the interest rate – Galiani’s price of insurance – is set too low. Credit booms occur at times of easy money, when financial risks are mispriced and market participants believe that the authorities will protect them from loss. On the eve of the financial crisis, insurance giant Marsh ran an advertising campaign with the slogan, ‘I risk therefore I am.’

‘We did not flinch from our post … throughout the succeeding week we made advances which would hardly be credited.’59 Bagehot’s argument that the Bank should serve as lender of last resort was not universally accepted by contemporaries. There was a widespread feeling that such a policy would encourage financial recklessness (moral hazard). During the Black Friday panic, The Times castigated failing banks for operating on insufficient capital: ‘if Private and Joint-stock Banks keep cash balances amounting to little more than five per cent. of their liabilities, they have no right to expect that they can escape the consequences of their recklessness and improvidence by resorting to the Bank of England,’ the Thunderer thundered.60 This controversy heated up after the publication of Lombard Street.

Until such a doctrine is repudiated by the banking interest, the difficulty of pursuing any sound principle of banking in London will be always very great.61 A sympathetic reviewer of Hankey’s Principles of Banking in The Times warned against suspending the Bank Act: ‘whenever it [suspension] has taken place houses which were insolvent and ought to have fallen beneath the attacks of their distrustful creditors have been enabled to weather the storm only to fall at length into greater ruin.’62 The reviewer didn’t say as much, but had the Bank Charter Act not been suspended during the earlier banking crisis of 1857, Overend Gurney would probably have failed at that date, thus sparing the City from the ‘reign of terror’ nearly a decade later.63 It is no coincidence that the chief proselytizers for central bank accommodation came from banking families. The family fortunes of both Baring and Bagehot were endangered by uncontrolled panics. To be fair, it should be noted that the Bagehot rule, in its original form, sought to mitigate moral hazard. The scion of Stuckey’s recommended that during panics the Bank of England should only lend for a short period, against high-quality collateral and should charge a high rate of interest for its money.fn7 The Bagehot rule is much cited by monetary policymakers in the twenty-first century. After the 2008 global financial crisis, US Treasury Secretary Tim Geithner, a former President of the New York Federal Reserve, referred to Lombard Street as the ‘bible of central banking’.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

activist fund / activist shareholder / activist investor, Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black Swan, bond market vigilante , bonus culture, Bretton Woods, business climate, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, Cornelius Vanderbilt, 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 engineering, financial innovation, financial intermediation, Fractional reserve banking, full employment, Glass-Steagall Act, God and Mammon, Golden arches theory, Gordon Gekko, greed is good, Hyman Minsky, income inequality, industrial research laboratory, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", 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, price stability, principal–agent problem, profit motive, proprietary trading, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, 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

Long before they acquired their monetary policy role – tightening and relaxing monetary conditions by, for example, raising or reducing interest rates – they acted as lenders of last resort to solvent banks that might otherwise have failed as a result of a contagious financial panic. Given the moral hazard arising from the reduction of market discipline implicit in last-resort lending and the similar moral hazard arising from the introduction of deposit insurance from the 1930s onwards, the central banks also acquired a role in regulating and supervising banks. Yet when Alan Greenspan was chairman of the Federal Reserve as the housing bubble inflated, he conspicuously failed to fulfil the Fed’s mandate to supervise the subprime mortgage market.

If a bank failed, creditors had recourse to all the personal assets of the individual partners. Once partnerships turned themselves into joint stock companies, the shareholders still enjoyed unlimited potential for gain but could never lose more than the amount they spent buying shares in the bank. This asymmetry was morally hazardous in that it encouraged greater risk taking. And in the nineteenth and twentieth centuries, commercial banks took more risks by extending their traditional deposit-taking and lending operations into investment banking and securities trading. Investment banking, which consists of issuing and distributing shares on behalf of corporate clients and making markets in shares, has a buccaneering culture wholly different from that of commercial banking.

There is always some jurisdiction, after all, in which the rules are looser than in most of the countries where a given bank is domiciled. As risk accumulates in areas that watchdogs find hard to monitor, the seeds of another crisis are sown. Come the crash, another round of imperfect re-regulatory measures is imposed. And so on, indefinitely. This vicious circle, when combined with morally hazardous bailouts when banks go bust, helps explain why there have been more than 100 major banking crises worldwide over the past three decades.49 This process of regulatory escalation can be clearly seen in the Basel capital accords, the international agreements referred to earlier governing the amount of capital banks must maintain.


pages: 580 words: 168,476

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

affirmative action, Affordable Care Act / Obamacare, airline deregulation, Alan Greenspan, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, behavioural economics, Berlin Wall, business cycle, 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, electricity market, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, Glass-Steagall Act, Great Leap Forward, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Bogle, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, London Interbank Offered Rate, lone genius, low interest rates, 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, Paul Volcker talking about ATMs, payday loans, Phillips curve, price stability, profit maximization, profit motive, public intellectual, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, search costs, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, stock buybacks, subprime mortgage crisis, 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, Tragedy of the Commons, 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

They did set aside about $50 billion from the Toxic Asset Relief Program for mortgage restructuring, but interestingly, the Obama administration has spent only about $3.4 billion of this amount—suggesting that it was the resistance of the banks, more than the money itself, that has been the real impediment to restructuring. 48. Even the use of the term “moral hazard” (as opposed the more neutral term “incentive effects”) has emotive overtones, suggesting that there is something immoral about these particular incentive responses. As the University of Pennsylvania law professor Tom Baker put it, the term “helps deny that refusing to share [the burdens of life] is mean-spirited or self-interested.” (Quoted in Shaila Dewan, “Moral Hazard: A Tempest-tossed Idea,” New York Times, February 26, 2012, p. BU1.) In fact, there is little evidence that there would be serious “moral hazard consequences” even of a generous program to help homeowners.

Shaun Donovan, secretary of the Department of Housing and Urban Development, argues that “only about 10 or 15 percent of Americans who can still pay their mortgages try to walk away from their debt.” Ibid. The general theory of moral hazard was developed in the midsixties and seventies by Arrow, Mirrlees, Ross, and Stiglitz. See, e.g., Kenneth Arrow, Aspects of the Theory of Risk Bearing (Helsinki, Finland: Yrjö Jahnssonin Säätiö, 1965); James Mirrlees, “The Theory of Moral Hazard and Unobservable Behaviour I,” Review of Economic Studies 66, no. 1 (1999): 3–21; S. Ross, “The Economic Theory of Agency: The Principal’s Problem,” American Economic Review 63, no. 2 (1973): 134–39; and J.

It would be “unfair” to help those who were struggling with their mortgages when there were so many good and responsible citizens who had worked hard and paid off their mortgage, or were able to make their current payments. Furthermore, offering relief to homeowners would exacerbate the problem of moral hazard: if individuals were left off the hook, it would undermine incentives to repay.48 What was curious about these arguments was that they could have applied just as easily, and with greater force, to the banks. The banks had repeatedly been bailed out. The Mexican bailout of 1995, the Indonesian, Thai, and Korean bailouts of 1997–98, the Russian bailout of 1998, the Argentinean bailout of 2000, these and others were all really bank bailouts, though they carried the name of the country where banks had lent excessively.


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A Theory of the Drone by Gregoire Chamayou

drone strike, failed state, Francis Fukuyama: the end of history, Jeff Hawkins, junk bonds, military-industrial complex, moral hazard, Necker cube, operational security, Panopticon Jeremy Bentham, private military company, RAND corporation, Seymour Hersh, telepresence, Yom Kippur War

What this argument postulates is that those other means really would have been used—in other words, that the military action would have taken place anyway, and it’s just a question of which weapon is used. But that is precisely what the moral hazard associated with drones renders doubtful. The sophistry becomes clear when one reflects that those other means might never have been employed because of the prohibitively high reputational costs associated with them. Another way of putting that is to say that in a situation of moral hazard, military action is very likely to be deemed “necessary” simply because it is possible, and possible at a lower cost.10 In such cases, it is necessarily false to say that the drone has inflicted less collateral damage: as Jeremy Hammond sums up, the number of civilian victims “of course isn’t lower than it would be if there weren’t drone strikes, in which case precisely zero civilians would be killed in them.”11 The second objection concerns the cumulativeness of lesser evils.

As John Kaag and Sarah Kreps write, given that “remote-controlled machines cannot suffer the consequences [of their actions] and the humans who operate them do so at a great distance, the myth of Gyges is more a parable of modern counterterrorism than it is about terrorism.”1 Freed from the constraints imposed by reciprocal relations, will the drone masters be able to continue to demonstrate virtue and to resist the temptation to commit injustice with virtually no sanction imposed? That question, to which we shall return, raises the matter of moral hazard. But there is another way of posing the problem. If it remains true that “the strongest is never strong enough to be always the master, unless he transforms his strength” into virtue,2 we may ask ourselves the following question: what kind of right or virtue is needed by these modern Gyges? Let us put that question another way: not whether the invisible man can be virtuous, but what redefinition of virtue will he need if he wishes to persist in calling himself virtuous and considering himself to be so even in his own eyes.

Assuming that the democratic commander in chief is a rational agent, how will the “low cost” of this weapon affect his decisions? The main effect is to introduce a massive bias into his decision. Any agent who can take action with fewer risks to himself or his camp is likely to adopt a riskier pattern of behavior—that is to say, riskier for others. Similarly, the drone is a classic “moral hazard”—a situation in which being able to act without bearing the costs of the consequences relieves agents of responsibility for their decisions.8 More precisely, we are told that drones introduce a threefold reduction in the costs traditionally attached to the use of armed force: a reduction of the political costs associated with the loss of national lives, a reduction of the economic costs associated with armament, and a reduction of the ethical or reputational costs associated with the perceived effects of the violence that is committed.9 That last point is very important.


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

"World Economic Forum" Davos, 3D printing, Airbnb, Alan Greenspan, Albert Einstein, Amazon Mechanical Turk, anti-fragile, 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, Big Tech, bilateral investment treaty, Bonfire of the Vanities, Boris Johnson, Bretton Woods, business cycle, 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, commons-based peer production, credit crunch, crony capitalism, cross-border payments, crowdsourcing, debt deflation, declining real wages, deindustrialization, disruptive innovation, Doha Development Round, Donald Trump, Double Irish / Dutch Sandwich, ending welfare as we know it, eurozone crisis, Evgeny Morozov, falling living standards, financial deregulation, financial innovation, Firefox, first-past-the-post, future of work, Garrett Hardin, gentrification, gig economy, Goldman Sachs: Vampire Squid, Greenspan put, Growth in a Time of Debt, housing crisis, income inequality, independent contractor, information retrieval, intangible asset, invention of the steam engine, investor state dispute settlement, it's over 9,000, James Watt: steam engine, Jeremy Corbyn, job automation, John Maynard Keynes: technological unemployment, labour market flexibility, light touch regulation, Long Term Capital Management, low interest rates, lump of labour, Lyft, manufacturing employment, Mark Zuckerberg, market clearing, Martin Wolf, means of production, megaproject, mini-job, Money creation, 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, Phillips curve, 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, Sam Altman, savings glut, Second Machine Age, secular stagnation, sharing economy, Silicon Valley, Silicon Valley startup, Simon Kuznets, SoftBank, sovereign wealth fund, Stephen Hawking, Steve Ballmer, structural adjustment programs, TaskRabbit, The Chicago School, The Future of Employment, the payments system, The Rise and Fall of American Growth, Thomas Malthus, Thorstein Veblen, too big to fail, Tragedy of the Commons, Travis Kalanick, Uber and Lyft, Uber for X, uber lyft, Y Combinator, zero-sum game, Zipcar

Some subsidies might be acceptable from an economic viewpoint if they were designed to compensate for ‘externalities’ (public benefits not reflected in the market price) and thus promote desired behaviour, such as investment in renewable energy or land conservation. However, most are not designed for this purpose and have nothing to do with creating or sustaining free markets. Subsidies involve moral hazards, inducing people or firms to behave in unethical ways just to qualify to receive them. Employment subsidy schemes exemplify one type of moral hazard known as the ‘deadweight effect’. Widely practised in industrialised countries, these costly schemes pay firms that increase employment. Evaluations have found that as many as nine out of every ten jobs for which the subsidy was paid would have been created anyway, without the subsidy.1 Politicians deceive in claiming that all those subsidised jobs result from the subsidy scheme, yet journalists report such claims as gospel.

Evaluations have found that as many as nine out of every ten jobs for which the subsidy was paid would have been created anyway, without the subsidy.1 Politicians deceive in claiming that all those subsidised jobs result from the subsidy scheme, yet journalists report such claims as gospel. Another moral hazard is associated with subsidies that pay firms to take on particular types of worker, such as youth or the long-term unemployed. This is ‘substitution’ – firing existing workers in order to take on others for whom the firm can claim a subsidy.2 In reality, moral hazards arise with most subsidies. Politically, one advantage of subsidies is their relative invisibility. Most who do not receive them are unaware of how much they are worth for those who do, or even that they exist.

The assurance of intervention amounts to a regressive subsidy to the affluent, who own shares. There is no macroeconomic justification for propping up stock markets. Research shows that declines in equities have little long-term adverse effect on the economy, since they affect only the wealthy. Central bank intervention also creates a moral hazard, since the message is passed that investors can take risks with impunity. It thus encourages rent-seeking speculation, making money from money, not from producing anything. This is one way by which independent central banks have pursued regressive policies, storing up problems for the future. Monetary policy has been recalibrated as central banks have become more secure from democratic accountability.


pages: 82 words: 24,150

The Corona Crash: How the Pandemic Will Change Capitalism by Grace Blakeley

Anthropocene, asset-backed security, basic income, Big Tech, bond market vigilante , Bretton Woods, business cycle, capital controls, carbon tax, central bank independence, coronavirus, corporate governance, COVID-19, creative destruction, credit crunch, crony capitalism, debt deflation, decarbonisation, degrowth, deindustrialization, don't be evil, financial deregulation, Francis Fukuyama: the end of history, full employment, gig economy, global pandemic, global value chain, green new deal, Greenspan put, income inequality, informal economy, inverted yield curve, invisible hand, Jeff Bezos, liberal capitalism, light touch regulation, lockdown, low interest rates, Martin Wolf, Modern Monetary Theory, moral hazard, move fast and break things, Network effects, North Sea oil, Northern Rock, offshore financial centre, pensions crisis, Philip Mirowski, post-war consensus, price mechanism, quantitative easing, regulatory arbitrage, rent control, reshoring, Rishi Sunak, savings glut, secular stagnation, shareholder value, social distancing, structural adjustment programs, too big to fail, universal basic income, unorthodox policies, Washington Consensus, yield curve

Regardless of their productivity, the sustainability of their business models or their environmental impact, the world’s largest firms will exit the current crisis with even more market power than they currently have. But the level of support being provided suggests that central banks are creating a problem of moral hazard – shielding investors, banks and businesses from the risks they took during the upswing of the economic cycle as soon as the downturn begins.20 Many though certainly not all corporations may also be rescued by outright nationalisation, to tide them over this sticky patch. The airline industry is a case in point.

And with airlines like British Airways, Singapore Airlines and Cathay Pacific all having been forced to ground more than 90 per cent of their fleets, more nationalisations are likely to follow, even allowing for a destabilising Lehman Brothers-type exception to the rule, possibly involving the likes of Virgin Atlantic. The present combination of state-provided liquidity and full-on bailouts mirrors the extraordinary interventions undertaken by states in the Global North to save their finance sectors in 2008 – only this time, the money is being directed towards the entire corporate sector. Moral hazard is a genuine issue – irresponsible lenders and uncreditworthy businesses are being protected by the state – but no one is seriously suggesting that the global economy be allowed to implode. States and central banks are now being forced to engage in the active planning of their entire economies under the imperial coordination of the Federal Reserve.

Ongoing centralisation during the pandemic will strengthen links between business and the state on the one hand – states will become more dependent upon these businesses for tax revenues and political funding, while the businesses will become more interested in regulation and tax policy – and businesses and the banks that manage their cash on the other. In other words, we will increasingly see private planning of the economy. Free market, competitive capitalism – if it ever actually existed – is dead. Many economic libertarians would recognise this critique. They frequently complain about moral hazard and loose monetary policy, blaming the overactivity of the state for the emergence of a form of ‘crony capitalism’ characterised by market centralisation, complex regulation and low productivity, and arguing for a return to a purer, more competitive, freer version of capitalism. These arguments are generally pitted against those of social democrats, who respond that state intervention is necessary to mitigate the ups and downs of the business cycle – to protect workers from the caprices of capitalist accumulation.


pages: 632 words: 159,454

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

accounting loophole / creative accounting, Alan Greenspan, anti-communist, Asian financial crisis, asset-backed security, Atahualpa, balance sheet recession, bank run, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, 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 engineering, financial innovation, fixed income, floating exchange rates, foreign exchange controls, Francisco Pizarro, full employment, German hyperinflation, Glass-Steagall Act, guns versus butter model, hiring and firing, income inequality, invisible hand, Isaac Newton, it's over 9,000, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, land bank, liberal capitalism, low interest rates, market bubble, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nixon triggered the end of the Bretton Woods system, oil shock, plutocrats, Ponzi scheme, price mechanism, quantitative easing, rolodex, Ronald Reagan, South Sea Bubble, subprime mortgage crisis, Suez canal 1869, 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

In his later work on the euro, Issing summarized the problem of ‘moral hazard’ which the euro created. ‘Moral hazard’ is a term in economics which has been defined as the ‘presence of incentives for individuals or institutions to act in ways that incur costs they do not have to bear’.39 One common instance of moral hazard exists in the case of insurance. Economists have observed that possessions which are insured are less well looked after than those without insurance. In 2008, just before the Greek sovereign-debt crisis, Issing wrote that the nations of the eurozone were conducting their fiscal policy under the condition of moral hazard. He wrote: ‘In a single currency area, the political benefit from deficit spending (gaining votes) is enjoyed by national [italics in original] players, while the potential negative effects in the form of higher interest rates (due to increased government borrowing) are felt by all [italics in original] member states.’

Lehman’s demise had wider repercussions, the reverberations of which were felt, and argued about, for years. Lehman’s problems raised the issue of moral hazard, which has already been referred to in connection with problems associated with the creation of the euro. It was decided, as Lehman tottered and eventually fell, not to ‘bail out’ the bank in order not to create moral hazard. ‘The idea that borrowers should be allowed to escape is one example of “moral hazard”,’ wrote Philip Coggan. ‘Let the borrowers believe they will be rescued from their folly . . . and they will never meet their responsibilities.’

He wrote: ‘In a single currency area, the political benefit from deficit spending (gaining votes) is enjoyed by national [italics in original] players, while the potential negative effects in the form of higher interest rates (due to increased government borrowing) are felt by all [italics in original] member states.’ This state of affairs ensured that ‘the resistance to deficit spending is reduced, and the propensity to pursue an (inappropriate) expansionary fiscal policy increases – a typical case of what is known as moral hazard [italics in original]’.40 Observations similar to those made by Issing in 2008 were made by Germans sceptical about the single-currency euro project at the very beginning of the 1990s. Indeed the scale of initial German distrust of the single currency is something which is often overlooked as the German economy came to be regarded as the anchor of the eurozone, and the German political elite began to see themselves as guardians and guarantors of the euro.


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Financial Fiasco: How America's Infatuation With Homeownership and Easy Money Created the Economic Crisis by Johan Norberg

accounting loophole / creative accounting, Alan Greenspan, bank run, banking crisis, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, business cycle, capital controls, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, diversification, financial deregulation, financial innovation, Greenspan put, helicopter parent, Home mortgage interest deduction, housing crisis, Howard Zinn, Hyman Minsky, Isaac Newton, Joseph Schumpeter, Long Term Capital Management, low interest rates, market bubble, Martin Wolf, Mexican peso crisis / tequila crisis, millennium bug, money market fund, moral hazard, mortgage tax deduction, Naomi Klein, National Debt Clock, new economy, Northern Rock, Own Your Own Home, precautionary principle, price stability, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail

When the United States got a central bank (the Fed) in 1914, its bank supervisor, the Office of the Comptroller of the Currency, happily declared that "financial and commercial crises or panics ... seem to be mathematically impossible."4 That, unfortunately, was wrong, because another effect was that banks and investors no longer stayed clear of big risks once they knew that they would be bailed out if there was a crisis. In fact, they were all of a sudden given an incentive to act irresponsibly, as they could privatize any gains but socialize any losses. This is usually referred to as "moral hazard." In his classic history of financial crises, Charles Kindleberger explains it thus: "The dilemma is that if investors knew in advance that government support would be forthcoming under generous dispensation when asset prices fall sharply, markets might break down somewhat more frequently because investors will be less cautious in their purchases of assets and of securities."5 What's more, in 1933 the United States introduced deposit insurance, meaning that savers would get their money back even if their bank went out of business.

That may not be a solution that he himself advocates, but he still thinks it would be better than today's system: "Given the frequency of banking crises, this might be a big improvement."' To limit the risk taking that government protection has encouraged, governments may demand to know more about what banks are up to, and if banks get into trouble, they may bail out depositors but let stockholders and senior executives lose their money and jobs. Another way to deal with moral hazard is to require banks not to lend too much relative to their capital. Under Basel I, capital requirements were calculated on the basis of a five-way breakdown of banks' assets. The assets that were deemed not to be in the least dangerous, such as cash or lending to Organization for Economic Cooperation and Development governments, did not count as risks at all, whereas the most precarious assets, such as lending to most corporations, counted at a rate of 100 percent.

Morgenson, "Debt Watchdogs." 12. Tett and Davies, "Out of the Shadows." 13. Berkshire Hathaway Inc., 2002 Annual Report, p. 13ff. 14. Krugrnan, "After the Money's Gone." 15. Fortune, "101 Dumbest Moments in Business." 16. The Economist, "On Credit Watch." 17. Stafford, "Traders Blind to Mounting Worries." 18. Dowd, "Moral Hazard and the Financial Crisis." 19. Reuters, "`US Homes Market Will Shed Investor Glut."' 20. Hilzenrath, "Fannie's Perilous Pursuit of Subprime Loans." 21. The Economist, "Fannie and Freddie Ride Again"; Duhigg, "Doubts Raised on Big Backers of Mortgages." 22. Duhigg, "At Freddie Mac, Chief Discarded Warning Signs." 23.


pages: 369 words: 94,588

The Enigma of Capital: And the Crises of Capitalism by David Harvey

accounting loophole / creative accounting, Alan Greenspan, anti-communist, Asian financial crisis, bank run, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, cotton gin, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, equal pay for equal work, European colonialism, failed state, financial innovation, Frank Gehry, full employment, gentrification, Glass-Steagall Act, global reserve currency, Google Earth, Great Leap Forward, Guggenheim Bilbao, Gunnar Myrdal, guns versus butter model, Herbert Marcuse, illegal immigration, indoor plumbing, interest rate swap, invention of the steam engine, Jane Jacobs, joint-stock company, Joseph Schumpeter, Just-in-time delivery, land reform, liquidity trap, Long Term Capital Management, market bubble, means of production, megacity, microcredit, military-industrial complex, Money creation, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Northern Rock, oil shale / tar sands, peak oil, Pearl River Delta, place-making, Ponzi scheme, precariat, reserve currency, Ronald Reagan, Savings and loan crisis, sharing economy, Shenzhen special economic zone , Silicon Valley, special drawing rights, special economic zone, statistical arbitrage, structural adjustment programs, subprime mortgage crisis, technological determinism, the built environment, the market place, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, Timothy McVeigh, too big to fail, trickle-down economics, urban renewal, urban sprawl, vertical integration, white flight, women in the workforce

Current chair of the White House’s National Economic Council Larry Summers, in a telling analysis of the effects of government bail-outs on financial behaviour in the wake of the stock market crash of 1987, clearly saw where the problems of moral hazard might lead, but concluded that the effects of government not standing behind financial institutions would be far worse than the effects of always bailing them out. The policy problem was not to avoid but to constrain moral hazard. Unfortunately, when Treasury Secretary in the late 1990s he forgot his own analysis and promoted exactly the kind of unconstrained moral hazard that he had earlier shown might wreck the economy (a clear case of denial in action). Paul Volcker, past chair of the Federal Reserve, warned of a financial crash within five years back in 2004.

Put crudely, the policy was: privatise profits and socialise risks; save the banks and put the screws on the people (in Mexico, for example, the standard of living of the population dropped by about a quarter in four years after the financial bail-out of 1982). The result was what is known as systemic ‘moral hazard’. Banks behave badly because they do not have to be responsible for the negative consequences of high-risk behaviour. The current bank bail-out is this same old story, only bigger and this time centred in the United States. In the same way that neoliberalism emerged as a response to the crisis of the 1970s, so the path being chosen today will define the character of capitalism’s further evolution.

The United States promptly reinvigorated the international Monetary Fund (IMF) (which the reagan administration had sought to de-fund in 1981 in accordance with strict neoliberal principle) as the global disciplinarian that would ensure that the banks would get their money back and that the people would be forced to pay up. IMF ‘structural adjustment programs’, which mandated austerity in order to pay back the banks, thereafter proliferated around the world. The result was a rising tide of ‘moral hazard’ in international bank lending practices. For a while, this practice was hugely successful. On the twentieth anniversary of the Mexican bail-out the chief economists from Morgan Stanley hailed it as ‘a factor that set the stage of increasing investor confidence worldwide and helped to ignite the growth market of the late 1990s, along with a strong US economic expansion’.


pages: 430 words: 109,064

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

Alan Greenspan, American ideology, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Bonfire of the Vanities, bonus culture, book value, break the buck, business cycle, business logic, buy and hold, capital controls, Carmen Reinhart, central bank independence, Charles Lindbergh, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency risk, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Glass-Steagall Act, Gordon Gekko, greed is good, Greenspan put, Home mortgage interest deduction, Hyman Minsky, income per capita, information asymmetry, interest rate derivative, interest rate swap, junk bonds, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, Martin Wolf, Michael Milken, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, proprietary trading, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, Savings and loan crisis, sovereign wealth fund, Tax Reform Act of 1986, The Myth of the Rational Market, too big to fail, transaction costs, Tyler Cowen, value at risk, yield curve

Figure 6-1 shows the perceived likelihood that major banks would go bankrupt, as measured by the price of credit default swap protection on their debt; each time the government intervened, the market’s fears ebbed, until finally the stress tests broke the year-long fever. That was what Wall Street needed to hear: they could go back to doing business as usual, and Washington would be there if things went wrong. A panic that began with an attempt to reduce moral hazard by letting Lehman fail only ended when everyone was convinced that the government would not let another major bank fail—magnifying moral hazard to an unprecedented degree. And as the real economy began to bottom out over the summer, it became easier and easier to make money again. But this was only true for the major banks; in the real economy, it became harder and harder to get a loan.

Support by the Federal Reserve can take two broad forms: liquidity loans, where the Fed gives a bank a short-term loan that can be rolled over repeatedly; and lower interest rates, which help banks by promoting economic growth and increasing the chances that bank loans will be paid back.* These steps can mitigate individual disasters. However, the existence of government insurance against a worst-case scenario creates “moral hazard”—the incentive for banks to take on more risk in order to maximize shareholder returns—thereby laying the groundwork for the next system-wide crisis. Each emergency rescue only increases banks’ confidence that they will be rescued in the future, creating a cycle of repeated booms, busts, and bailouts.72 In principle, in exchange for providing this insurance, the Federal Reserve would supervise the banks it was protecting, preventing them from taking too much risk.

As Figure 1-1 demonstrates, the half-century following the Glass-Steagall Act saw by far the fewest bank failures in American history.103 But once financial deregulation began in the 1970s, these low equity levels became increasingly dangerous.104 Figure 1-1: Bank Suspensions and Failures Per Year, 1864—Present * Actual values for 1930-33 are 1,352, 2,294, 1,456, and 4,004. Source: David Moss, “An Ounce of Prevention: Financial Regulation, Moral Hazard, and the End of ‘Too Big to Fail,’” Harvard Magazine, September–October 2009. Used with the permission of Mr. Moss. Updated with data from FDIC, “Failures and Assistance Transactions.” Some of the regulations in place during this period may have been excessive. For example, it’s not clear that limiting banks to a single state—a long-standing rule in the United States that was reaffirmed in the 1930s—makes them safer (other than by restricting competition, which increases their profits).


pages: 782 words: 187,875

Big Debt Crises by Ray Dalio

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, break the buck, Bretton Woods, British Empire, business cycle, buy the rumour, sell the news, capital controls, central bank independence, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, declining real wages, equity risk premium, European colonialism, fiat currency, financial engineering, financial innovation, foreign exchange controls, German hyperinflation, global macro, housing crisis, implied volatility, intangible asset, it's over 9,000, junk bonds, Kickstarter, land bank, large denomination, low interest rates, manufacturing employment, margin call, market bubble, market fundamentalism, military-industrial complex, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Northern Rock, Ponzi scheme, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, refrigerator car, reserve currency, risk free rate, Savings and loan crisis, short selling, short squeeze, sovereign wealth fund, subprime mortgage crisis, too big to fail, transaction costs, universal basic income, uptick rule, value at risk, yield curve

Unlike in the Great Depression, when the Fed allowed banks to fail en masse, the Fed took the view that although it would be good to minimize moral hazard when possible, its top priority had to be saving the economy. Tim Geithner, who was the president of the New York Fed at the time, shared my thinking. He believed the moral hazard framework was the wrong way to think about policy during a financial crisis because policy needs to be very aggressive in taking out catastrophic risk, and one can’t move slowly or precisely.13 That has proven true time and time again. Providing plenty of liquidity during a liquidity crisis leaves the government open to less risk and leaves the system healthier. In contrast, the moral hazard framework leads people to believe that if you let things burn, the government will assume less risk.

–New York Times September 21, 2007 Economic Indicators Drop the Most in 6 Months as Confidence Ebbs –Bloomberg September 22, 2007 Fed Governor Warns Against Shielding Investors From Their Losses –Bloomberg September 24, 2007 Beware Moral Hazard Fundamentalists “The term ‘moral hazard’ originally comes from the area of insurance. It refers to the prospect that insurance will distort behaviour, for example when holders of fire insurance take less precautions with respect to avoiding fire or when holders of health insurance use more healthcare than they would if they were not insured. In the financial arena the spectre of moral hazard is invoked to oppose policies that reduce the losses of financial institutions that have made bad decisions.

The other consideration was that the problems all stemmed from wrongheaded speculation, and anything that the Fed did to ameliorate the problems of those speculators would only encourage them to take excessive risks again in the future. This notion of “moral hazard” was one that the Fed (and Treasury) would have to wrestle with many times throughout the crisis. How the “moral hazard” question is dealt with during big debt crises is one of the biggest determinants of how these crises turn out. Because undisciplined lending and borrowing was the cause of crisis, it is natural to want to let those who were responsible experience the consequences of their actions, and to impose lots of discipline by tightening lending and borrowing.


pages: 296 words: 87,299

Portfolios of the poor: how the world's poor live on $2 a day by Daryl Collins, Jonathan Morduch, Stuart Rutherford

behavioural economics, Cass Sunstein, clean water, failed state, financial innovation, financial intermediation, income per capita, informal economy, job automation, M-Pesa, mental accounting, microcredit, moral hazard, profit motive, purchasing power parity, RAND corporation, randomized controlled trial, seminal paper, The Fortune at the Bottom of the Pyramid, transaction costs

Dinesh’s illness led to a sell-off of land, and forced his wife to take on added burdens. Only insurance arrangements (or tax-funded public safety nets) can aggregate these kinds of risks, provide urgently needed resources at the right time, and do so without creating additional obligations. Two Sides of Moral Hazard One of the concerns that economists have about insurance is the problem of moral hazard: that being insured for one’s health may also change one’s behavior. The problem arises if the insured start neglecting themselves, knowing they have insurance to cover health problems in the future, which increases the likelihood that they will need insurance.

Providing insurance profitably also entails high-quality actuarial analysis, careful pricing policies, and wise investments: these are complex skills not widely available outside the formal insurance industry, a fact that makes it hard for informal and semiformal providers to compete with formal providers in the way that they have so spectacularly succeeded in doing for microcredit. On the other hand, insurers like those entering the funeral insurance market in South Africa must not only be confident that moral hazard and fraud are kept to a minimum, but, in order to compete successfully with informal schemes, they must bring down the costs and increase the speed of verifying claims and making payouts. They also need better marketing strategies and better ways of spreading risk through market-based tools. 91 CHAPTER THREE Insurers need help reaching the poorer and more remote groups.

This efficiency may apply as much to informal as to formal insurance, helping to explain why community-based funeral coverage has thrived in South 92 DEALING WITH RISK Africa, whereas we found no equivalent in the field of health. Other risks that are insurable in principle, such as crop or livestock loss, are harder to implement in practice because of moral hazard, outright fraud, and documentation difficulties—it is notoriously difficult to know exactly whose cow it was that died, or indeed whether it died of natural causes. Because of these limitations, the poor will continue to face many risks that are not easily insurable. The list of common emergencies in table 3.1 includes, for example, violent crime and the failure to receive a payment.


pages: 270 words: 79,180

The Middleman Economy: How Brokers, Agents, Dealers, and Everyday Matchmakers Create Value and Profit by Marina Krakovsky

Affordable Care Act / Obamacare, Airbnb, Al Roth, Ben Horowitz, Benchmark Capital, Black Swan, buy low sell high, Chuck Templeton: OpenTable:, Credit Default Swap, cross-subsidies, crowdsourcing, deal flow, disintermediation, diversified portfolio, experimental economics, George Akerlof, Goldman Sachs: Vampire Squid, income inequality, index fund, information asymmetry, Jean Tirole, Joan Didion, John Zimmer (Lyft cofounder), Kenneth Arrow, Lean Startup, Lyft, Marc Andreessen, Mark Zuckerberg, market microstructure, Martin Wolf, McMansion, Menlo Park, Metcalfe’s law, moral hazard, multi-sided market, Network effects, patent troll, Paul Graham, Peter Thiel, pez dispenser, power law, real-name policy, ride hailing / ride sharing, Robert Metcalfe, Sand Hill Road, search costs, seminal paper, sharing economy, Silicon Valley, social graph, supply-chain management, TaskRabbit, the long tail, The Market for Lemons, the strength of weak ties, too big to fail, trade route, transaction costs, two-sided market, Uber for X, uber lyft, ultimatum game, Y Combinator

And yet, as the chapters on Certifiers and Enforcers showed, middlemen must be discriminating to avoid adverse selection and moral hazard. Therefore, to profit from risk, middlemen, like successful insurers, must be astute at teasing apart these two types of risk: •Internal risk. This is my term for what finance scholars call counterparty risk, or risk due to the characteristics or actions of a trading partner. In other words, internal risks are risks caused by asymmetric information (adverse selection and moral hazard). Risk-bearing middlemen should avoid internal risk because it can only harm them and their partners on the other side.

Not so with services: regardless of service providers’ underlying ability, they can decide how much effort to put in and how honestly to conduct business. Sussing out hidden information about sellers, as Certifiers do, won’t protect buyers from shirking and cheating, problems that can come up after buyers sign on the dotted line. These problems of shirking and cheating, variously called moral hazard, postcontractual opportunism, or hidden action1—are especially acute when a player’s actions are hidden and when buyers and sellers don’t have an ongoing relationship. An ongoing relationship can protect against such problems, as long as the future value of the relationship is higher than the gains from cheating or shirking today.

The middleman who is able to bear risk can profit from doing so by charging a risk premium, while the more risk-averse party doesn’t mind paying the risk premium to reduce risk. So why don’t we see middlemen bearing most of the risk? The answer to this risk-sharing question goes back to the old problems of adverse selection and moral hazard. Most economic outcomes in the world are some combination of effort and chance (or skill and luck). How many widgets a sales rep sells, for example, depends on how hard the rep works, how good the rep is at sales to begin with, and factors completely outside the rep’s control, from the quality of the widget to the state of the economy.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

accounting loophole / creative accounting, active measures, airline deregulation, Alan Greenspan, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Big bang: deregulation of the City of London, bilateral investment treaty, book value, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon credits, Carmen Reinhart, central bank independence, classic study, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, democratizing finance, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, foreign exchange controls, full employment, Gini coefficient, Glass-Steagall Act, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, Kickstarter, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, military-industrial complex, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, proprietary trading, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, scientific management, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, stock buybacks, structural adjustment programs, subprime mortgage crisis, Tax Reform Act of 1986, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, vertical integration, very high income, Washington Consensus, We are all Keynesians now, Works Progress Administration, zero-coupon bond, zero-sum game

Japan displayed its usual “follow-the-leader mentality” in a case where “neither transnational institutional linkages nor interest in the Mexican rescue were strong.”27 On the other hand, the IMF directors from Germany, the UK, the Netherlands, Belgium, Switzerland, and Norway registered their discomfort with the Treasury’s ultimatum (the Executive Board was given only twenty-four hours to look at the plan) by abstaining on the vote. But this was “as strong a diplomatic sign of disapproval as they felt they could send without undermining the rescue”; they recognized that more than their aversion to “moral hazard” would be at stake if “one of the shining stars of market-oriented reform in the developing world . . . became an international financial pariah.”28 In response to Germany’s continued harping about moral hazard, the IMF’s chief economist, Michael Mussa, commented tersely: “And if we hadn’t rescued 800 people from the Titanic, we would have taught everyone an even more valuable lesson about the dangers of ocean travel.”29 If this crisis was indeed the harbinger of a new level of global financial instability, what was just as significant was that the Mexican crisis was, to a remarkable degree, effectively contained.

The UK’s 1973 “secondary banking” crisis, which was also due to the collapse of a real-estate bubble, “threatened some of the biggest financial institutions with the real risk of collapse.”86 Moreover, a broad range of European banks were revealing major losses amid the volatility in short-term capital flows that were initially triggered by both floating currencies and the recycling of petrodollars. This came to a head in June 1974, when the Bundesbank allowed Bankhaus I.D. Herstatt of Cologne, one of Germany’s largest private banks, to collapse. Apart from the Bundesbank’s traditional obsession with a tight monetary policy, this was justified in terms of avoiding “moral hazard’—that is, “to teach speculators, as well as banks dealing with speculators, a lesson.”87 But in contrast to the carefully managed Franklin crisis that the Fed and OCC were engaged in, the consequence of the Bundesbank’s action was that the Herstatt crisis immediately spilled over to the international interbank lending markets, including nearly collapsing the New York clearing house, CHIPS, which connects the dozen or so largest US banks with major banks around the world in processing payments among them primarily related to foreign exchange transactions.

The pattern of letting banks that were too small to matter go under, while acting as lender of last resort to save the ones that were “too big to fail” was set in 1982, when Volcker bluntly told the Federal Open Market Committee (FOMC): “If it gets bad enough, we can’t stay on the side or we’ll have a major liquidity crisis. It’s a matter of judgment as to when and how strongly to react. We are not here to see the economy destroyed in the interest of not bailing somebody out.”78 The “moral hazard” tightrope that the state had to walk in this respect was nothing compared with the practical hazard involved in figuring out whether allowing even a small bank to collapse might have systemic effects. This was vividly demonstrated in the summer of 1982, when the decision to close a small Oklahoma bank, Penn Square, immediately endangered Continental Illinois, the sixth-largest commercial bank in the US, which then immediately turned to the international interbank market for its funding.


pages: 348 words: 99,383

The Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy's Only Hope by John A. Allison

Affordable Care Act / Obamacare, Alan Greenspan, American ideology, bank run, banking crisis, Bear Stearns, Bernie Madoff, business cycle, clean water, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, fiat currency, financial innovation, Fractional reserve banking, full employment, Greenspan put, high net worth, housing crisis, inverted yield curve, invisible hand, life extension, low skilled workers, market bubble, market clearing, minimum wage unemployment, money market fund, moral hazard, negative equity, obamacare, open immigration, Paul Samuelson, price mechanism, price stability, profit maximization, quantitative easing, race to the bottom, reserve currency, risk/return, Robert Shiller, subprime mortgage crisis, The Bell Curve by Richard Herrnstein and Charles Murray, too big to fail, transaction costs, Tyler Cowen, yield curve, zero-sum game

In October 2010, as an ex-CEO, Mozilo settled out of court on civil fraud charges for misleading investors on risky mortgages, but Countrywide’s buyer (Bank of America) ended up paying most of the $67 million to the SEC. Bank of America also paid $600 million to settle a class-action lawsuit filed by Countrywide’s robbed shareholders. 6. See Bert Ely, “Financial Innovation and Deposit Insurance: The 100% Cross-Guarantee Concept,” Cato Journal (Winter 1994), pp. 413–445, and Bert Ely, “Regulatory Moral Hazard: The Real Moral Hazard in Federal Deposit Insurance,” Independent Review (Fall 1999), pp. 241–254. 7. See Michael Keeley, “Deposit Insurance, Risk, and Market Power in Banking,” American Economic Review (1980), pp. 1183–1200, and Gary Gorton and Richard Rosen, “Corporate Control, Portfolio Choice and the Decline of Banking,” Journal of Finance (1995), pp. 1377–1420. 8.

However, there are all types of good and bad stories and unintended secondary consequences that make the plans of the social policy “do-gooders” destructive, both economically and in terms of the effect on real human beings. Visit a mortgage collection center some time and listen to the stories. In fact, let me tell you a story to help you grasp the moral hazard risk. In the fall of 2008, I was visiting BB&T’s mortgage collection center to try to boost the morale of our employees. One of our collectors whom I had known for a long time handed me a phone call from a client. This client had moved from the Northeast to Florida about 18 months before. He had purchased a $1,000,000 house, and BB&T had made him a $600,000 loan.

According to this individual, the house was now worth $500,000. He wanted us to reduce his interest rate from 5½ percent to 3 percent and forgive $100,000 of his debt. Interestingly, he had $800,000 on deposit with the bank. I asked him whether, if the house had appreciated to $2,000,000, he would have given us the $1,000,000 gain. I don’t think so. Moral hazard is a real risk. There is also a significant job-destroying effect of not letting the housing market correct. Individuals who do want to buy a house will not do so until they believe the market has bottomed. As long as there is a massive inventory of unsold homes in the foreclosure process, new homes will not be built because potential buyers are concerned about future home-price declines.


pages: 267 words: 74,296

Unhappy Union: How the Euro Crisis - and Europe - Can Be Fixed by John Peet, Anton La Guardia, The Economist

"World Economic Forum" Davos, bank run, banking crisis, Berlin Wall, Bretton Woods, business cycle, capital controls, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, debt deflation, Doha Development Round, electricity market, eurozone crisis, Fall of the Berlin Wall, financial engineering, fixed income, Flash crash, illegal immigration, labour market flexibility, labour mobility, light touch regulation, low interest rates, market fundamentalism, Money creation, 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

To borrow Schäuble’s phrase about banking union, there could first be a “wooden” structure, followed by a steel one. But if debtors are to agree to more discipline, they need confidence that a system of greater solidarity will follow. Germany has every reason to worry about moral hazard. Weak countries might fail to reform once market pressure is lifted. But moral hazard applies to the strong too: no sooner had fear of the euro’s break-up subsided than Germany started to water down banking union. A plan for greater sharing of liabilities matched by the restoration of a credible no-bail-out rule could prove an attractive bargain.

Spain mattered not only because it was larger than the other bailed-out states, but also because it was the the last link in the chain of contagion before Italy. The size of the euro zone’s firewall was inadequate because it could not protect Italy. Eurobonds were unacceptable because they would mean Germany having to guarantee Italy’s gargantuan debt. And the fear of moral hazard was acute, in part because nobody trusted Italian politicians to reform. Italy at least had the foresight not to engage in fiscal stimulus, and its primary budget (that is, before interest payments) was in surplus. Moreover, its banks seemed in reasonable shape, and domestic savings were high.

She had already lost her “chancellor’s majority” in votes to approve bail-out programmes, meaning that she now had to rely on votes from the opposition Social Democrats. In some ways Draghi’s threat of unlimited intervention worked too well. As pressure from markets eased, so did the pressure to fix the euro zone. The danger of moral hazard did not apply just to debtors; it applied to creditor countries too. Leaders may have pledged to do “whatever it takes”, but more often it was a matter of doing “as little as we can get away with”. Ugliness on Aphrodite’s island The new doctrines of banking union would be tested sooner than expected, in the case of Cyprus.


pages: 351 words: 102,379

Too big to fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis--and themselves by Andrew Ross Sorkin

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Andy Kessler, Asian financial crisis, Bear Stearns, Berlin Wall, book value, break the buck, BRICs, business cycle, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deal flow, Dr. Strangelove, Emanuel Derman, Fall of the Berlin Wall, fear of failure, financial engineering, fixed income, Glass-Steagall Act, Goldman Sachs: Vampire Squid, housing crisis, indoor plumbing, invisible hand, junk bonds, Ken Thompson, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Michael Milken, Mikhail Gorbachev, money market fund, moral hazard, naked short selling, NetJets, Northern Rock, oil shock, paper trading, proprietary trading, risk tolerance, Robert Shiller, rolodex, Ronald Reagan, Savings and loan crisis, savings glut, shareholder value, short selling, sovereign wealth fund, supply-chain management, too big to fail, uptick rule, value at risk, éminence grise

As Bernanke, looking exhausted, sat slumped at a long table in the lodge’s wood-paneled conference room, speaker after speaker stood up to criticize the Fed’s approach to the financial crisis as essentially ad hoc and ineffective, and as promoting moral hazard. Only Alan Blinder, once a Fed vice chairman and a former Princeton colleague of Bernanke’s, defended the Fed. Blinder told this tale: One day a little Dutch boy was walking home when he noticed a small leak in the dike that protected the people in the surrounding town. He started to stick his finger in the hole. But then he remembered the moral hazard lesson he had learned in school…. “The companies that built this dike did a terrible job,” the boy said. “They don’t deserve a bailout, and doing so would just encourage more shoddy construction.

The previous day, Bernanke, in his address to the symposium, had made a plea to move beyond a finger-in-the-dike strategy by urging Congress to create a “statutory resolution regime for nonbanks.” “A stronger infrastructure would help to reduce systemic risk,” Bernanke noted. It would also mitigate moral hazard and the problem of “too big to fail” by reducing the range of circumstances in which systemic stability concerns might be expected by markets to prompt government intervention. A statutory resolution regime for nonbanks, besides reducing uncertainty, would also limit moral hazard by allowing the government to resolve failing firms in a way that is orderly but also wipes out equity holders and haircuts some creditors, analogous to what happens when a commercial bank fails.

In other words, they’re saying, is this now the wave of the future, Mr. Secretary? That financial institutions that get in trouble in the future turn to the government to get bailed out?” It was a particularly poignant question; only nights before Paulson had railed on a conference call with all the Wall Street CEOs about “moral hazard”—that woolly economic term that describes what happens when risk takers are shielded from the consequences of failure; they might take ever-greater risks. “Well, again, as I said, I don’t believe the Bear Stearns shareholders feel they’ve been bailed out right now,” Paulson repeated. “The focus is clearly, all of our focus is on what’s best for the American people and how to minimize the impact of the disruption in the capital markets.”


Battling Eight Giants: Basic Income Now by Guy Standing

basic income, Bernie Sanders, carbon tax, centre right, collective bargaining, decarbonisation, degrowth, diversified portfolio, Donald Trump, Elon Musk, Extinction Rebellion, full employment, future of work, Gini coefficient, income inequality, Intergovernmental Panel on Climate Change (IPCC), job automation, labour market flexibility, Lao Tzu, longitudinal study, low skilled workers, Martin Wolf, Mont Pelerin Society, moral hazard, North Sea oil, offshore financial centre, open economy, pension reform, precariat, quantitative easing, rent control, Ronald Reagan, selection bias, universal basic income, Y Combinator

As with all targeted schemes, many of those eligible would not be reached, while those receiving the free food would, as a result, face an even greater poverty trap and accompanying precarity trap than exist in the British welfare state today.6 The proposal would also generate a new moral hazard. Someone deemed food insecure, and thus entitled to free meals, would have a disincentive to become food secure, unless the free food on offer were lousy (which could hardly be a policy objective, even though it is likely to be a policy outcome). That moral hazard would be accompanied by an equally perverse ‘immoral’ hazard, since some people would have an incentive to become food insecure deliberately in order to claim free meals.7 Providing ‘the poor’ with free food would extend the charity state and institutionalize the obnoxious system of food banks, which have mushroomed in the austerity era.

But in a flexible modern, service-oriented labour market, that is not the case. The sort of wages and jobs that someone on benefit could expect to obtain are low and uncertain. As successive governments have admitted, someone going from benefits into a low-paid job faces in effect a marginal tax rate of over 80%. The poverty trap creates a moral hazard, because it acts as a disincentive to doing what someone would otherwise wish to do, in this case taking a job; it also creates an ‘immoral’ hazard: because people gain so little and lose so much, they may be tempted to enter the ‘black economy’, not declaring work they are doing, and thus risk losing entitlement to certain benefits and even prosecution.

See also individual entries definition 1, 4–8 reasons for need 8–9 security 98, 113, 114 system 1, 20, 23, 26, 32, 37, 52, 70, 84, 90–1, 122 n.7 Basic Income Earth Network (BIEN) 94 behavioural conditionality 70, 73, 77, 114 behaviour-testing 4, 39, 70, 84 benefits 5, 7, 27 conditional schemes 41 social assistance 23 BET365 11 Beveridge, William 8–9, 38 Beveridge model 21 Big Bang liberalization 18 BJP 92 black economy 40, 60 B-Mincome 99–100 Booker, Cory 101 brain development 98–9 132 Branson, Richard 54 Brexit 53 Britain 6, 8–10, 12–18, 20, 23–4, 26–7, 30–1, 33–4, 37–8, 40–2, 55, 57, 59, 90, 101, 104, 112 British Columbia 95 British Constitution 1 Buck, Karen 57 bureaucracy 40, 49, 100, 102 Bureau of Economic Analysis 16 Business Property Relief 58 California 69, 96–7 Canada 35 capacity-to-work tests 6, 104 cap-and-trade approach 34 Capita 50 capital dividend 59 capital fund 89–90 capital grants 59, 75, 76, 92 carbon dividends 37 carbon emissions 33–4 carbon tax 34–5, 37 care deficit 53 care work 36, 53, 67, 74, 84 cash payments 111 cash transfers 99 ‘casino dividend’ schemes 88 charities 48 The Charter of the Forest (1217) 1 Chicago 99 Child Benefit 57, 58, 72, 123 n.4 childcare 99, 110–11 child development 88 Child Tax Credits 81 chronic psychological stress 26 Citizens Advice 46–8 Citizen’s Basic Income Trust 7, 122 n.7, 123 n.4 citizenship rights 1, 29 civil society organizations 79 Index climate change 34 Clinton, Hillary 126 n.4 Clinton, Bill 105 Coalition government 41, 50 cognitive performance 33 collateral damage 53 common dividends 7, 20, 21, 59–60, 69, 73, 75, 83, 84, 85 Commons Fund 8, 35, 57, 59, 89 community cohesion 3 resilience 23 work 84 ‘community payback’ schemes 102 Compass 59 compensation 2, 7, 16, 104 ‘concealed debt’ 24–5 conditional cash transfer schemes 90 Conservative government 9, 85 Conservatives 23 consumer credit 24 consumption 23 contractual obligations 46 Coote, Anna 113 cost of living 25, 49, 52, 83 council house sales 76 council tax 25 Crocker, Geoff 122 n.15 cross-party plans 80 crowd-funded schemes 100 deadweight effects 102 ‘deaths of despair’ 27 Deaton, Angus 10 debt 23–6, 67, 85 debt collection practices 24–5 decarbonization 34 dementia 33 democratic values 69 Democrats 37 demographic changes 15 Index 133 Department for Work and Pensions (DWP) 11–12, 42–8, 50–2, 73, 81, 92, 129 n.6 depression 28, 94 direct taxes 56, 58 disability benefits 6, 49–52, 83 Disability Living Allowance (DLA) 49–51 Disabled People Against Cuts 52 Dividend Allowance 58 ‘dividend capitalism’ 8 domestic violence 29, 87 Dragonfly 92 due process 46, 49 ecological crisis 33, 37, 39, 114 ecological developments 21 ecological disaster 35 ecological taxes and levies 37 economy benefits 20, 60 crisis 106 damage 34 growth 20, 36, 106 industrialized 20 insecurity 21, 35, 39, 89 security 75, 80, 84, 88 system 15, 27, 38 tax-paying 60 uncertainty 8, 22–3, 31 ‘eco-socialism’ 8 ecosystems 33 Edinburgh 80 education 88, 108 Elliott, Larry 122 n.15 employment 16, 22, 39, 60–1, 81, 89, 93–4, 102, 106, 107, 110, 114 Employment Support Allowance (ESA) 27, 41, 49–51 England 28, 63, 110–11 Enlightenment 85 Entrepreneurs’ Relief 18 equality 31, 85 Europe 37 European Foundation for the Improvement of Living and Working Conditions (Eurofound) 120 n.1 European Heart Journal 33 European Union 6, 17, 41 euthanasia 113 extinction 33–7 ‘Extinction Rebellion’ 33 Fabian Society 57–8 Facebook 97 family allowances 56 family benefits 56 family insecurity 23 federal welfare programs 106 Fife 24, 80 financial crash (2007–8) 23, 26, 34 financialization 116 n.22 financial markets 18 Financial Services Authority 123 n.15 Financial Times 19, 123 n.15 financial wealth 18 Finland 28, 61, 93–5 food banks 10, 29–30, 43, 109 food donations 29 food insecurity 108–9 fossil fuels 33–4 France 12, 17, 18, 32, 38, 57 free bus services 112 freedom 8, 30, 84, 85, 101, 114 ‘free food’ 108–9, 129 n.6 ‘free’ labour market 106 free trade 13 Friends Provident Foundation 75 fuel tax 35 fund and dividend model 89 funding 29, 59, 62, 69, 71–2, 112 134 G20 (Group of 20 large economies) 15 Gaffney, Declan 57 Gallup 105 GDP 14, 17–18, 23–4, 34, 36, 59, 89, 108 General Election 91–2, 94 ‘genuine progress indicator’ 36 Germany 17–18, 38, 100 Gillibrand, Kirsten 101 Gini coefficient 9, 12 GiveDirectly 91 Glasgow City 80 globalization 14 Global Wage Report 2016/17 14 global warming 33, 37 Good Society 75, 106 The Great British Benefits Handout (TV series) 92 Great Depression 9 Great Recession 23 greenhouse gas emissions 34, 36 gross cost 110 The Guardian 101, 103, 122–3 n.15 Hansard Society 37 Harris, Kamala 101 Harrop, Andrew 57 Hartz IV 100 HartzPlus 100 health 67, 87, 100 human 33 insurance premiums 35 services 60 healthcare costs 28 hegemony 14 help-to-buy loan scheme 76 Her Majesty’s Revenue and Customs (HMRC) 64, 73, 81 Hirschmann, Albert 56 household debt 24 Index household earnings 16 household survey 12 House of Commons 110–11 housing allowance 95 Housing Benefit 24, 41, 53, 71 housing policy 53 hub-and-spoke model 112 Hughes, Chris 97 humanity 33 human relations 3 ‘immoral’ hazard 109 ‘impact’ effects 78 incentive 62 income 81 assistance 88 average 83 components 11 distribution system 4, 13–14, 38, 67, 84, 107, 114 gap 9 growth 16 insecurity 27 men vs. women 15–16 national 14, 36 pensioners’ 16 rental 13–15, 20 social 14, 16–17 support payments 110 tax 1, 7, 57, 89, 111 transfer 85 volatility 22 India 68, 80, 90–2 Indian Congress Party 91 inequality 2, 4, 9–13, 21, 29, 31, 33, 35, 37, 38, 39, 54, 80, 85, 114 growth 17 income 9–10, 15–17, 19 living standard 20 wealth 18–19, 76 informal care 111 Index 135 inheritance tax 58 in-kind services 111 insecurity 21–3, 29, 38, 39, 47, 67, 85, 106 Institute for Fiscal Studies (IFS) 10 Institute for Public Policy Research 125 n.17 Institute for Public Policy Research (IPPR) 75, 111 Institute of New Economic Thinking 123 n.15 Institute of Public Policy Research 59 insurance schemes 8 intellectual property 14–15 Intergovernmental Panel on Climate Change (IPCC) 34 International Labour Organization (ILO) 14, 122 n.4 International Monetary Fund (IMF) 31, 34 international tax evasion 18 interpersonal income inequality 83 inter-regional income inequalities 83 intra-family relationships 3 involuntary debt 26 in-work benefits 22 Ireland 35 Italy 18 labour 31, 107 inefficiency 106 law 101 markets 8, 14, 32, 39, 40, 60, 62–3, 96, 100, 106 regulations 13 supply 67, 95 Labour governments 85 labourism 106 Lansley, Stewart 59 Latin America 90 Left Alliance 94 Lenin, Vladimir Ilyich 113 Liberal government 35 life-changing errors 51 life-threatening illness 33 Liverpool 80 living standards 20, 23, 33, 36, 53, 59, 92 Local Housing Allowances 24 London Homelessness Project 92–3 low-income communities 33 low-income families 21 low-income households 17 low-income individuals 86 Low Pay Commission 63 low-wage jobs 60, 107 Luddite reaction 32 lump-sum payments 35, 59, 76 Jackson, Mississippi 99 JobCentrePlus 47 job guarantee policy 101–7 job-matching programs 106 Jobseeker’s Allowance (JSA) 41, 46 Joseph Rowntree Foundation 21 McDonnell, John 129 n.13 McKinsey Global Institute 31 Macron, Emmanuel 35 Magna Carta 1 ‘Making Ends Meet’ 97 ‘mandatory reconsideration’ stage 51 Manitoba 87–8 Manitoba Basic Annual Income Experiment (Mincome) 87 market economy 105, 114 master-servant model 101 Kaletsky, Anatole 123 n.15 Kenya 90–2 Khanna, Ro 103 Kibasi, Tom 113 136 Index Maximus 50 means-testing 4, 39, 42, 48, 58, 61–2, 70, 84, 88, 90, 109–10, 114 benefits 5, 7, 27, 40, 46, 56, 71–3, 81, 129 n.6 social assistance 23, 41, 95, 122 n.7 system 6 medical services 28 Mein Grundeinkommen (‘My Basic Income’) 100 mental health 26, 28, 94 disorders 88 trusts 28 mental illness 33, 68 migrants 7, 113 ‘minimum income floor’ 45 Ministry of Justice 51 modern insecurity 22 modern life 31 monetary policy 59 Mont Pelerin Society 13 moral commitment 75 moral hazard 109 mortality 27, 76 multinational investment funds 34 Musk, Elon 31, 54 Namibia 90–2 National Audit Office (NAO) 24, 43–4, 46, 76 National Health Service (NHS) 8, 24, 27–8, 44, 68, 80, 108, 111 National Insurance 18, 22, 124 n.4 nationalism 37 National Living Wage 63 National Minimum Wage 63–4 national solidarity 3 Native American community 88 negative income tax (NIT) 23, 87, 95, 100 neo-fascism 37–8 neoliberalism 13, 84 Netherlands 96 New Economics Foundation (NEF) 57, 113, 122 n.15 non-resident citizens 113 non-wage benefits 16 non-wage work 74 North America 67 North Ayrshire 80 North Carolina 88 North Sea oil 89–90 Nyman, Rickard 23 Oakland 96–7 Office for National Statistics (ONS) 14–15, 17, 36 Ontario, Canada 95–6 open economy 84 open ‘free’ markets 13, 15 opportunity dividend 59 Organization for Economic Co-operation and Development (OECD) 18, 23, 27, 31 Ormerod, Paul 23 Osborne, George 19 Paine, Thomas 2, 75 Painian Principle 2 panopticon state 55 Paris Agreement (2015) 34 participation income 74–5 paternalism 42, 55 pauperization 63 Pawar, Alderman Ameya 99 pay contributions 21 pension contributions 18, 58 Pension Credit 41 Pericles Condition 75 permanent capital fund 71 personal care services 110–11 Index 137 personal income tax 35 Personal Independence Payment (PIP) 49–51 personal insecurity 23 Personal Savings Allowance 58 personal tax allowances 17, 58, 59 perverse incentives 50 physical health 26, 94 piloting in Britain 67–81 applying 80–1 rules in designing 70–80 policy development 3, 69 political decision 78 political discourse 92 political instability 35 political system 38 populism 37–8, 75 populist parties 37 populist politics 39 Populus survey 55 post-war system 8 poverty 2, 4, 10–12, 22, 27, 29, 36, 38, 40, 60–1, 89, 100, 108–9, 114, 125 n.17, 129 n.6 precarity 29–30, 38, 39, 60–1, 85, 103, 129 n.6 Primary Earnings Threshold 124 n.4 private debt 23–4, 39 private inheritance 2 private insurance 85 private property rights 13 private wealth 18 privatization 13, 17, 112 property prices 76 prostitution 43 Public Accounts Committee (PAC) 51 public costs 28 public debt 23 public inheritance 61 public libraries 47 public policy 97 public sector managers 103 public services 4, 17, 62, 108, 112, 114 public spending 89 public wealth 18 ‘quantitative easing’ policy 59 quasi-basic income 89, 98 quasi-universal basic services 30 quasi-universal dividends 35 quasi-universal system 61, 70, 90 Randomised Control Trial (RCT) 124–5 n.14 rape 44 Ratcliffe, Jim 12 Reagan, Ronald 13 Reed, Howard 59 refugees 7 regressive universalism 57 regular cash payment 7 rent arrears 24 controls 53 rentier capitalism 13–21, 107, 116 n.22 republican freedom 2–3, 30, 84 Republicans 37 Resolution Foundation 10, 15, 19, 25, 76 ‘revenue neutral’ constraint 7 right-wing populism 37–8 robot advance 31–3 Royal College of Physicians 33 Royal Society of Arts 55, 59, 124 n.12 RSA Scotland 125 n.17 Rudd, Amber 9 Russia 113 138 Sanders, Bernie 101 scepticism 31 schooling 67, 89 Scotland 69, 80, 111 Second World War 19, 21 security 8, 38, 55, 68, 84 economic 3, 4, 49, 56 income 73–4 social 8, 22, 49 Self-Employed Women’s Association (SEWA) 68 self-employment 45 Shadow Chancellor of the Exchequer 3, 115 n.3 Smith, Iain Duncan 42 ‘snake oil’ 113 social assistance 3, 28 social benefit 20 social care 102, 104, 110–11 social crisis 106 social dividend scheme 92 Social Fund 29 social inheritance 2 social insecurity 21 social insurance 22, 85 social integration 44 social justice 2, 8, 20, 69, 84, 101, 114 social policy 8, 23, 26, 30, 42, 53, 84–5, 96 social protection system 32 social relation 100 social security 10, 70–1, 95 social solidarity 3, 8, 39, 61, 84–5, 91 social spending 17 social status 104 social strife 35 social value 29 ‘something-for-nothing’ economy 19–20, 61 Index Speenhamland system 63 State of the Global Workplace surveys 105 statutory minimum wages 106 stigma 47, 55 stigmatization 41, 109 Stockton 97–9 Stockton Economic Empowerment Demonstration (SEED) 97 stress 26–9, 39, 51, 67, 68, 85, 93 student loans 24 substitution effects 102–3 suicides 26–7 Summers, Larry 105–6 Sweden 113 Swiss bank Credit Suisse 12 Switzerland 35 tax advantages 49 and benefit systems 17, 18, 69, 110 credits 3, 17, 24, 63, 105, 106 policies 16 rates 72 reliefs 17–18, 57–8, 61 tax-free inheritance 19 technological change 105 technological revolution 14, 31, 114 ‘teething problems’ 42 Thatcher, Margaret 13 Thatcher government 9, 18 The Times 92 Torry, Malcolm 122 n.7 Trades Union Congress 24 tribal casino schemes 76 ‘triple-lock’ policy 16 Trump, Donald 37 Trussell Trust 29, 43 Tubbs, Michael 97–8 Index 139 Turner, Adair 123 n.15 two-child limit 44 UK.


pages: 285 words: 86,174

Twilight of the Elites: America After Meritocracy by Chris Hayes

"Hurricane Katrina" Superdome, "World Economic Forum" Davos, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, barriers to entry, Bear Stearns, 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, meritocracy, meta-analysis, military-industrial complex, money market fund, moral hazard, Naomi Klein, Nate Silver, peak oil, plutocrats, Ponzi scheme, post-truth, radical decentralization, Ralph Waldo Emerson, rolodex, Savings and loan crisis, The Spirit Level, too big to fail, University of East Anglia, Vilfredo Pareto, We are the 99%, WikiLeaks, women in the workforce

Stack came to believe this to be true not just in tax law, but in every single part of American life: the rich and powerful blatantly flouted the law without sanction, bending the law to their own benefit or simply writing the law themselves, while guys like him couldn’t catch a break. A society in which cheaters, shirkers, and incompetents face no sanction, where bad behavior meets reward, is a morally hazardous one. In economics, the term “moral hazard” refers to the perverse incentives that can arise when agents are insulated from the cost of their actions: A hypochondriac with a health insurance plan that covers the full cost of doctor’s visits will make more appointments than one who has a sizable co-pay; a banker who knows at some level that the cost of catastrophically bad bets will ultimately be picked up by the government has far less incentive to avoid blowing everything up while in the zealous pursuit of the highest yield possible.

HN90.E4H39 2012 305.5’20973—dc23 2012002435 eISBN: 978-0-307-72047-4 Jacket design by Ben Wiseman Jacket photography © Ryan McVay/Getty Images v3.1 To my mom and dad, who taught me how to see the world. Contents Cover Title Page Copyright Dedication Chapter One THE NAKED EMPERORS Chapter Two MERITOCRACY AND ITS DISCONTENTS Chapter Three MORAL HAZARDS Chapter Four WHO KNOWS? Chapter Five WINNERS Chapter Six OUT OF TOUCH Chapter Seven REFORMATION Acknowledgments Notes Selected Bibliography About the Author Chapter 1 THE NAKED EMPERORS Now see the sad fruits your faults produced, Feel the blows you have yourselves induced

It would reflexively protect its worst members, it would operate with a wide gulf between performance and reward, and would be shot through with corruption, rule-breaking, and self-dealing as those on top pursued the outsize rewards promised for superstars. In the way the bailouts combined the worst aspects of capitalism and socialism, such a social order would fuse the worst aspects of meritocracy and bureaucracy. It would, in other words, look a lot like the American elite circa 2012. Chapter 3 MORAL HAZARDS The bargain has been breached.… The American people do not think the system is fair, or on the level. —JOE BIDEN ON THE MORNING OF FEBRUARY 18, 2010, ANDREW Joseph Stack woke in his home in the quiet, leafy neighborhood of North Austin, Texas. A self-employed software consultant and a part-time bassist in a local band, Joe, as his friends called him, started the day by setting fire to his house.


pages: 510 words: 120,048

Who Owns the Future? by Jaron Lanier

3D printing, 4chan, Abraham Maslow, Affordable Care Act / Obamacare, Airbnb, augmented reality, automated trading system, barriers to entry, bitcoin, Black Monday: stock market crash in 1987, book scanning, book value, Burning Man, call centre, carbon credits, carbon footprint, cloud computing, commoditize, company town, computer age, Computer Lib, crowdsourcing, data science, David Brooks, David Graeber, delayed gratification, digital capitalism, digital Maoism, digital rights, Douglas Engelbart, en.wikipedia.org, Everything should be made as simple as possible, facts on the ground, Filter Bubble, financial deregulation, Fractional reserve banking, Francis Fukuyama: the end of history, Garrett Hardin, George Akerlof, global supply chain, global village, Haight Ashbury, hive mind, if you build it, they will come, income inequality, informal economy, information asymmetry, invisible hand, Ivan Sutherland, Jaron Lanier, Jeff Bezos, job automation, John Markoff, John Perry Barlow, Kevin Kelly, Khan Academy, Kickstarter, Kodak vs Instagram, life extension, Long Term Capital Management, machine translation, Marc Andreessen, Mark Zuckerberg, meta-analysis, Metcalfe’s law, moral hazard, mutually assured destruction, Neal Stephenson, Network effects, new economy, Norbert Wiener, obamacare, off-the-grid, packet switching, Panopticon Jeremy Bentham, Peter Thiel, place-making, plutocrats, Ponzi scheme, post-oil, pre–internet, Project Xanadu, race to the bottom, Ray Kurzweil, rent-seeking, reversible computing, Richard Feynman, Ronald Reagan, scientific worldview, self-driving car, side project, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Skype, smart meter, stem cell, Steve Jobs, Steve Wozniak, Stewart Brand, synthetic biology, tech billionaire, technological determinism, Ted Nelson, The Market for Lemons, Thomas Malthus, too big to fail, Tragedy of the Commons, trickle-down economics, Turing test, Vannevar Bush, WikiLeaks, zero-sum game

Consider the expansion of the financial sector prior to the Great Recession. It’s not as if that sector was accomplishing any more than it ever had. If its product is to manage risk, it clearly did a terrible job. It expanded purely because of its top positions on networks. Moral hazard has never met a more efficient amplifier than a digital network. The more influential digital networks become, the more potential moral hazard we’ll see, unless we change the architecture. A First Pass at a Definition A Siren Server, as I will refer to such a thing, is an elite computer, or coordinated collection of computers, on a network. It is characterized by narcissism, hyperamplified risk aversion, and extreme information asymmetry.

Upon hearing that I propose that people be able to earn their livings in part just for doing what they do while being watched by cloud algorithms, the parent voice can be expected to say: “Doing what you want shouldn’t be a way of earning a living. Allowing even a hint of that is the very core of moral hazard. The moment kids get a whiff of the notion, they’ll never learn to take on the sheer pain of growing up—or the self-sacrifice of doing a job or paying a mortgage—and civilization will fall apart.” The child voice doesn’t listen to any of this, naturally, but instead demands exactly the same thing using a different argument: “Why bring money into it?

Living languages ought to require continued examples from living people in order for automated translation services to stay up to date. If the cloud has learned all it will ever need to learn to translate between English and Chinese, it means those languages have become fixed. People ought to be in the driver’s seat and not allow the network to define and capture a language for all time. A humanistic economy would remove moral hazards that might incentivize artificial language stasis, and other similar traps. If a language translation service becomes so refined that it requires only one one-hundredth of the data gathering it did in its early years, just to keep up to date with new expressions, then that service should not be surprised to pay a hundred times more for a given amount of the latest data it requires.


Super Thinking: The Big Book of Mental Models by Gabriel Weinberg, Lauren McCann

Abraham Maslow, Abraham Wald, affirmative action, Affordable Care Act / Obamacare, Airbnb, Albert Einstein, anti-pattern, Anton Chekhov, Apollo 13, Apple Newton, autonomous vehicles, bank run, barriers to entry, Bayesian statistics, Bernie Madoff, Bernie Sanders, Black Swan, Broken windows theory, business process, butterfly effect, Cal Newport, Clayton Christensen, cognitive dissonance, commoditize, correlation does not imply causation, crowdsourcing, Daniel Kahneman / Amos Tversky, dark pattern, David Attenborough, delayed gratification, deliberate practice, discounted cash flows, disruptive innovation, Donald Trump, Douglas Hofstadter, Dunning–Kruger effect, Edward Lorenz: Chaos theory, Edward Snowden, effective altruism, Elon Musk, en.wikipedia.org, experimental subject, fake news, fear of failure, feminist movement, Filter Bubble, framing effect, friendly fire, fundamental attribution error, Goodhart's law, Gödel, Escher, Bach, heat death of the universe, hindsight bias, housing crisis, if you see hoof prints, think horses—not zebras, Ignaz Semmelweis: hand washing, illegal immigration, imposter syndrome, incognito mode, income inequality, information asymmetry, Isaac Newton, Jeff Bezos, John Nash: game theory, karōshi / gwarosa / guolaosi, lateral thinking, loss aversion, Louis Pasteur, LuLaRoe, Lyft, mail merge, Mark Zuckerberg, meta-analysis, Metcalfe’s law, Milgram experiment, minimum viable product, moral hazard, mutually assured destruction, Nash equilibrium, Network effects, nocebo, nuclear winter, offshore financial centre, p-value, Paradox of Choice, Parkinson's law, Paul Graham, peak oil, Peter Thiel, phenotype, Pierre-Simon Laplace, placebo effect, Potemkin village, power law, precautionary principle, prediction markets, premature optimization, price anchoring, principal–agent problem, publication bias, recommendation engine, remote working, replication crisis, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, ride hailing / ride sharing, Robert Metcalfe, Ronald Coase, Ronald Reagan, Salesforce, school choice, Schrödinger's Cat, selection bias, Shai Danziger, side project, Silicon Valley, Silicon Valley startup, speech recognition, statistical model, Steve Jobs, Steve Wozniak, Steven Pinker, Streisand effect, sunk-cost fallacy, survivorship bias, systems thinking, The future is already here, The last Blockbuster video rental store is in Bend, Oregon, The Present Situation in Quantum Mechanics, the scientific method, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Tragedy of the Commons, transaction costs, uber lyft, ultimatum game, uranium enrichment, urban planning, vertical integration, Vilfredo Pareto, warehouse robotics, WarGames: Global Thermonuclear War, When a measure becomes a target, wikimedia commons

For example, will you drive more recklessly in a rental car after you purchase extra rental insurance, simply because you’re more protected financially from a crash? On average, people do. This phenomenon, known as moral hazard, is where you take on more risk, or hazard, once you have information that encourages you to believe you are more protected. It has been a concern of the insurance industry since the seventeenth century! Sometimes moral hazard may involve only one person: wearing a bike helmet may give you a false sense of security, leading you to bike more recklessly, but you are the one who bears all the costs of a bike crash. Moral hazards can also occur when a person or company serves as an agent for another person or company, making decisions on behalf of this entity, known as the principal.

When she sells her own house, an agent holds out for the best offer; when she sells yours, she encourages you to take the first decent offer that comes along. Like a stockbroker churning commissions, she wants to make deals and make them fast. Why not? Her share of a better offer—$150—is too puny an incentive to encourage her to do otherwise. Moral hazard and principal-agent problems can occur because of asymmetric information, where one side of a transaction has different information than the other side; that is, the available information is not symmetrically distributed. Real estate agents have more information about the real estate market than sellers, so it is hard to question their recommendations.

The only way this system works, though, is if healthy, lower-risk people continue paying into the system, allowing insurers to spread out the cost of higher-risk individuals. This helps keep premiums from rising too high, making care more affordable for everyone. That’s why the ACA mandate was so important to the viability of the overall system. The mental models from the last section (tragedy of the commons, externalities, etc.) and those from this section (moral hazard, information asymmetry, etc.) are signs of market failure, where open markets without intervention can create suboptimal results, or fail. To correct a market failure, an outside party must intervene in some way. Unfortunately, these interventions themselves can also fail, a result called government failure or political failure.


pages: 402 words: 110,972

Nerds on Wall Street: Math, Machines and Wired Markets by David J. Leinweber

"World Economic Forum" Davos, AI winter, Alan Greenspan, algorithmic trading, AOL-Time Warner, Apollo 11, asset allocation, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, Bob Litterman, book value, business cycle, butter production in bangladesh, butterfly effect, buttonwood tree, buy and hold, buy low sell high, capital asset pricing model, Charles Babbage, citizen journalism, collateralized debt obligation, Cornelius Vanderbilt, corporate governance, Craig Reynolds: boids flock, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Danny Hillis, demand response, disintermediation, distributed generation, diversification, diversified portfolio, electricity market, Emanuel Derman, en.wikipedia.org, experimental economics, fake news, financial engineering, financial innovation, fixed income, Ford Model T, Gordon Gekko, Hans Moravec, Herman Kahn, implied volatility, index arbitrage, index fund, information retrieval, intangible asset, Internet Archive, Ivan Sutherland, Jim Simons, John Bogle, John Nash: game theory, Kenneth Arrow, load shedding, Long Term Capital Management, machine readable, machine translation, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, market fragmentation, market microstructure, Mars Rover, Metcalfe’s law, military-industrial complex, moral hazard, mutually assured destruction, Myron Scholes, natural language processing, negative equity, Network effects, optical character recognition, paper trading, passive investing, pez dispenser, phenotype, prediction markets, proprietary trading, quantitative hedge fund, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Reminiscences of a Stock Operator, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Metcalfe, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, semantic web, Sharpe ratio, short selling, short squeeze, Silicon Valley, Small Order Execution System, smart grid, smart meter, social web, South Sea Bubble, statistical arbitrage, statistical model, Steve Jobs, Steven Levy, stock buybacks, Tacoma Narrows Bridge, the scientific method, The Wisdom of Crowds, time value of money, tontine, too big to fail, transaction costs, Turing machine, two and twenty, Upton Sinclair, value at risk, value engineering, Vernor Vinge, Wayback Machine, yield curve, Yogi Berra, your tax dollars at work

Shooting the Moon 299 Wildly Complex Derivatives Traded on Analyzed with Utterly Opaque Markets Even More Complex Pricing Models Lack of Market Prices Create Need for Driven by Carelessly Inappropriate Data Figure 12.10 An interconnected structure for disaster: uses and abuses of technology in bringing on the Great Mess of ’08. There are many other causes, over-leverage, moral hazard (“heads, I win, tails, you lose”), and heads in the sand. These are the ones that involve wires. Figure 12.10 shows the vicious circle of financial technology errors that contributed to our sorry situation today—the design of monstrously complex incomprehensible derivatives, which then required monstrously complex valuation models, since there was no transparent market to provide this information.

New structural flaws in the government’s rescue plans are revealed on an almost daily basis. The incentives for these plans to work to the 312 Nerds on Wall Str eet benefit of the country, and not the failed firms, are poorly aligned. The new American bank initiative (NABI) would involve no moral hazard,* no hoarding banks, no government ownership, and no throwing good money after bad. Most important, it will immediately provide $7 trillion or more in unencumbered lending capacity to real projects—green energy, infrastructure, and auto and other manufacturing. It is also the best plan for preserving the operational and human assets of failed banks and saving existing solvent institutions by making everyone confident in the availability of funds again.

Unfortunately, these solutions ignore the fact that every relevant institution is in survival mode and will only use any liquidity or capital injections as a cushion in case their sources of funding dry up or their assets have to be further written down (very likely considering where we are in the economic cycle). Even worse, they all involve some type of moral hazard by cushioning the losses for equity and unsecured debt holders (who are to varying degrees responsible for the crisis). The recent reports of capital injections effectively being used for dividends and deferred compensation are perhaps the most heinous examples of taxpayer funds being used to directly pay existing equity holders and management.


pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

Alan Greenspan, asset-backed security, bank run, banking crisis, Bernie Madoff, bond market vigilante , bonus culture, Bretton Woods, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, deal flow, disintermediation, diversification, fiat currency, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, foreign exchange controls, Francis Fukuyama: the end of history, George Santayana, global reserve currency, Greenspan put, Home mortgage interest deduction, inverted yield curve, Isaac Newton, joint-stock company, junk bonds, Kickstarter, liquidity trap, London Interbank Offered Rate, long peace, low interest rates, margin call, market clearing, mass immigration, Money creation, money market fund, moral hazard, mortgage tax deduction, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, Phillips curve, plutocrats, Ponzi scheme, profit maximization, proprietary trading, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, Suez canal 1869, systems thinking, tail risk, The Great Moderation, the long tail, the new new thing, the payments system, too big to fail, value at risk, very high income, War on Poverty, We are all Keynesians now, Y2K, yield curve

Both the banks and regulators end up going through the motions. It is hard to name a single banking crack-up that was ever spotted and prevented by formal regulatory procedures in any jurisdiction. MORAL HAZARD Meanwhile, the fact that deposits are insured by the government motivates everyone from depositors to bankers to politicians to act like spoiled children instead of grown-ups. Economists call this The Limits of Financial Regulation infantilization of conduct ‘‘moral hazard.’’ Basically, moral hazard is what happens when you remove consequences for risky behavior. If you know in advance that the judge will let you off if you are stopped for a DWI, you might be inclined to drive with a few drinks in you.

Fairness requires that government work to reverse the most troubling aspect of the free market: There are always a few winners and many losers, and many of the winners start life on third base. Conveniently, the few cannot defend their property in a system of universal elective franchise where majorities rule, a point that the great Victorian legal scholar A.V. Dicey made in arguing that letting people who got more out of the state than they paid in tax constituted a moral hazard. Politicians would always grab more and more from the few and spend it to buy political power through providing financial security to the many. Representation without taxation leads as certainly to tyranny as taxation without representation. ILLIBERALISM The New Deal and FDR’s four presidential victories prove that Dicey was on to something, as does the perennial power of socialist parties 181 182 Conclusion in European electoral politics.

See also Credit money, Coinage, Commodity money, Deposit money, Paper money money market, 4, 6, 13, 23, 41–42, 84, 86–87, 90, 102, 106, 108, 110, 130, 150, 167 monoline credit insurers, 66 monopoly, 65, 81, 84–85, 95–96, 124; clearing and settlement, 13; deposit taking, 12, 15, 19, 90 Monte dei Paschi di Siena, bank, 79 ‘‘moral hazard,’’ 128–129, 181 Morgan Bank, 87, 108, 142–143 Morgan, J.P., 103, 105, 121, 164 Mortgages, 7, 18, 25, 35, 41, 55–58, 61–64, 66, 71–73, 110, 113, 121, 130–134, 142, 165, 176, 185, 187 NASDAQ, 165 National Accounts (US), 6, 113 National Bank Act of 1864 (US), 38 negotiable instrument, 10, 33, 35, 38–39, 130, 145 New Deal, 56, 114, 117, 126, 128, 130, 141–143, 154, 158–159, 162–163, 166, 176, 181–182, 184, 187, 189 Newton, Sir Isaac, 137 Nikkei, stock index, 168, 171 Nixon, Richard M., 154–155 Northern Rock, 86 NOW (Negotiable Order of Withdrawal) account, 130 off-shore banking centers, 150 open market operations, 107–108, 145 OPM or ‘‘Other People’s Money,’’ 15–19, 22, 26–27, 39, 46, 61, 71, 87–88, 92–93, 104, 129, 144–145, 150, 165, 167 Index ‘‘options,’’ 54–55, 75, 77 overdraft, 37–38, 61, 78, 89–90 Pac-Man banking, 157, 159 panics, xix–xx, 2, 5, 19, 45, 48, 98, 102, 109–10, 121, 136, 140–141, 150, 164, 183; of 1873, 5, 103; of 1907, 103; of 2008, 52; use of, 139 ‘‘paper money,’’ xiv–xvi, 14, 29, 33, 35, 83, 97.


pages: 183 words: 17,571

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

Alan Greenspan, banking crisis, banks create money, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, bond market vigilante , Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, compensation consultant, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, currency risk, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, Glass-Steagall Act, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, junk bonds, labor-force participation, light touch regulation, liquidity trap, London Interbank Offered Rate, low interest rates, market bubble, market clearing, Martin Wolf, means of production, Michael Milken, mobile money, Money creation, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nixon triggered the end of the Bretton Woods system, Paul Volcker talking about ATMs, Ponzi scheme, profit motive, proprietary trading, prudent man rule, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, Savings and loan crisis, seigniorage, shareholder value, Silicon Valley, SoftBank, Solyndra, 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

Of course, the US government did let Lehman fail, partially because the Federal Reserve did not have the authority it needed to bail out an investment bank. But the authorities also feared that doing so—and in effect reinforcing the idea that no major firm would be allowed to fail under any circumstances—would give rise to an extremely dangerous level of moral hazard in the financial markets. Moral hazard is an economic term for how people behave when their actions have no downside. Successful and often repeated rescues of the financial economy during the Greenspan years had led to a situation of “Heads, I win; tails, the government pays.” Sometimes this is referred to as private profits and socialized losses, and even deposit insurance is tainted with the same problem.

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. Surely, the authorities could see the domino effect that would occur if they let Lehman go down? Economists use the term moral hazard to describe what happens when the consequences of bad decisions are eliminated. For example, deposit insurance means you don’t have to evaluate the soundness of your bank. Uncle Sam will always make you whole if it goes bust.What would happen if deposit insurance was abolished overnight during a market panic?

This lender-of-last-resort function is fundamental to central banking, but creates great risks to the taxpayer, so it logically requires that the central bank have an ability to supervise the behavior of private-sector banks. Otherwise, the very fact that someone is willing and able to bail them out of the consequences of risky behavior in fact provides incentives to the private-sector banks for that behavior—a concept knows as a moral hazard, as mentioned previously. The second key reason why some degree of financial regulation is legitimate is that deposit money in banks forms the basis of the payments system. Payments system is an arcane term for all the institutions and mechanisms that allow one person or organization to transfer monetary claims to another.


pages: 192

Kicking Awaythe Ladder by Ha-Joon Chang

Asian financial crisis, business cycle, central bank independence, classic study, clean water, colonial rule, Corn Laws, corporate governance, creative destruction, David Ricardo: comparative advantage, fear of failure, income inequality, income per capita, joint-stock company, joint-stock limited liability company, land bank, land reform, liberal world order, moral hazard, open economy, purchasing power parity, rent-seeking, scientific management, short selling, Simon Kuznets, tacit knowledge, The Wealth of Nations by Adam Smith, trade liberalization, Washington Consensus

However, for a few centuries after its invention in the sixteenth century for highly risky large-scale commercial projects (the British East India Company being the best-known early example), it tended to be regarded with great suspicion. Many people believed that it led to excessive risk-taking (or what today we call 'moral hazard') on the part of both owners and managers. They regarded it as an institution that undermined what was then regarded - along with greed - as one of the key disciplinary mechanisms of capitalism, namely, fear of failure and destitution, especially given the harshness of bankruptcy laws at the time (see section 3.2.4.C).

Britain banned the formation of new limited liability companies on these grounds with the Bubble Act in 1720, although with the repeal of the act in 1825 it was again allowed.63 However, as has been proven repeatedly over the last few centuries, limited liability provides one of the most powerful mechanisms to 'socialize risk', which has made possible investments of unprecedented scale. That is why, despite its potential to create 'moral hazard', all societies have come to accept limited liability as a cornerstone of modern corporate governance.64 In many European countries, limited liability companies - or joint stock companies as they were known in those days - had existed under ad hoc royal charters since the sixteenth century.6S However, it was not until the mid-nineteenth century that it began to be granted as a matter of course, rather than as a privilege.

Generalized limited liability was first introduced in Sweden in 1844. England followed this closely with the 1856 Joint Stock Company Act, although limited liabilities for banks and insurance companies were introduced somewhat later (1857 and 1862 respectively), reflecting the then widespread concern that they could pose serious 'moral hazard'. Rosenberg and Birdzell document how, even a few decades after the introduction of generalized limited liability (the late nineteenth century), small businessmen 'who, being actively in charge of a business as well as its owner, sought to limit responsibility for its debts by the device of incorporation' were frowned upon.66 In Belgium, the first limited liability company was founded in 1822, and the 1830s saw the formation of a large number of such companies.


pages: 409 words: 125,611

The Great Divide: Unequal Societies and What We Can Do About Them by Joseph E. Stiglitz

"World Economic Forum" Davos, accelerated depreciation, accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Alan Greenspan, Asian financial crisis, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, carried interest, classic study, clean water, collapse of Lehman Brothers, collective bargaining, company town, computer age, corporate governance, credit crunch, Credit Default Swap, deindustrialization, Detroit bankruptcy, discovery of DNA, Doha Development Round, everywhere but in the productivity statistics, Fall of the Berlin Wall, financial deregulation, financial innovation, full employment, gentrification, George Akerlof, ghettoisation, Gini coefficient, glass ceiling, Glass-Steagall Act, global macro, global supply chain, Home mortgage interest deduction, housing crisis, income inequality, income per capita, information asymmetry, job automation, Kenneth Rogoff, Kickstarter, labor-force participation, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market fundamentalism, mass incarceration, moral hazard, mortgage debt, mortgage tax deduction, new economy, obamacare, offshore financial centre, oil shale / tar sands, Paul Samuelson, plutocrats, purchasing power parity, quantitative easing, race to the bottom, rent-seeking, rising living standards, Robert Solow, Ronald Reagan, Savings and loan crisis, school vouchers, secular stagnation, Silicon Valley, Simon Kuznets, subprime mortgage crisis, The Chicago School, the payments system, Tim Cook: Apple, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Turing machine, unpaid internship, upwardly mobile, urban renewal, urban sprawl, very high income, War on Poverty, Washington Consensus, We are the 99%, white flight, winner-take-all economy, working poor, working-age population

Wasting money on banks might be necessary to save the economy, and any fine-tuning of the bank rescue programs apparently was viewed as a luxury we could not afford. But exactly the opposite attitude was taken in regard to homeowners and ordinary citizens: we had to proceed carefully, so as not to make any mistakes. Terms like “moral hazard” were thrown around glibly—the risk that a bailout to homeowners would encourage reckless borrowing—even though the real moral hazard issue was that of the banks, which had been rescued time after time. Standard economics—taught in virtually every textbook—calls for a fiscal stimulus when the economy is weak. But we had learned from the Bush 2008 tax cut for the rich that a poorly designed stimulus would be relatively ineffective.

Going forward, it would discourage prudence on the part of homeowners—the “moral hazard problem” well-known to economists. I never understood how he (like so many in the banking community) could embrace such a double standard. Bailing out bad banks was, in these terms, not only unfair to other banks; it was unfair to the millions of Americans who were suffering because of the misdeeds of the banks. It was going to the assistance of the victimizer, and leaving the victims to take care of themselves. If there was ever need for proof of the relevance of moral hazard, the bankers had provided it: the savings-and-loan bailout, and the Mexican, Korean, Thai, and Indonesian bailouts, which were all really bailouts of Western financial institutions.

The president’s former Treasury secretary, Timothy Geithner, in his recent book, Stress Test, made a valiant but unsuccessful attempt to defend the administration’s actions, suggesting that there were no alternatives. But Geithner clearly worried excessively about the “moral hazard” of helping underwater homeowners—in other words, encouraging lax borrowing habits—while seeming to care far less about the moral hazard of helping banks, or the culpability of the banks in encouraging excessive indebtedness and in marketing mortgages that put unbearable risks on the poor and middle classes. In fact, Geithner’s attempts to justify what the administration did only reinforce my belief that the system is rigged.


pages: 307 words: 82,680

A Pelican Introduction: Basic Income by Guy Standing

"World Economic Forum" Davos, anti-fragile, bank run, basic income, behavioural economics, Bernie Sanders, Bertrand Russell: In Praise of Idleness, Black Lives Matter, Black Swan, Boris Johnson, British Empire, carbon tax, centre right, collective bargaining, cryptocurrency, David Graeber, declining real wages, degrowth, deindustrialization, Donald Trump, Elon Musk, Fellow of the Royal Society, financial intermediation, full employment, future of work, gig economy, Gunnar Myrdal, housing crisis, hydraulic fracturing, income inequality, independent contractor, intangible asset, Jeremy Corbyn, job automation, job satisfaction, Joi Ito, labour market flexibility, land value tax, libertarian paternalism, low skilled workers, lump of labour, Marc Benioff, Mark Zuckerberg, Martin Wolf, mass immigration, mass incarceration, moral hazard, Nelson Mandela, nudge theory, offshore financial centre, open economy, Panopticon Jeremy Bentham, Paul Samuelson, plutocrats, precariat, quantitative easing, randomized controlled trial, rent control, rent-seeking, Salesforce, Sam Altman, self-driving car, shareholder value, sharing economy, Silicon Valley, sovereign wealth fund, Stephen Hawking, The Future of Employment, universal basic income, Wolfgang Streeck, women in the workforce, working poor, Y Combinator, Zipcar

The advice of an expert (or perhaps a ‘nudge’ by a government-appointed adviser) may have poor results for one person and good ones for another at a different time. In effect, the capital grant leaves too much to chance. It would be difficult to refuse help for people if, for whatever reason, they subsequently fell upon hard times. But this would also create a moral hazard, since expectation of further financial support if the money was lost could tempt some recipients into more reckless decisions. By contrast, a modest amount paid as a regular basic income would not encourage excessive risk-taking, and would have the added advantage of allowing people to learn over time how to handle money if they had not been able to do so previously.

As it happened, I did manage to work for a short while, only to have to push myself far too hard to replace the benefit lost, leading to a relapse from which I have never recovered.6 A basic income paid as a right would remove the worst poverty trap and this precarity trap. It would reduce the moral hazard entailed by existing social assistance schemes, that people do not do what they would otherwise wish to do (for example, taking a job). It would also reduce the immoral hazard of entering the shadow or black economy instead, because the disincentives to entering the legal tax-paying economy are excessive.

Dynamic and Feedback Effects A fundamental drawback of both back-of-the-envelope exercises and simulation models is their essentially static approach, ignoring the potential dynamic effects of basic income on economic activity. For instance, as noted earlier, a basic income would remove the disincentive posed by poverty and precarity traps to take low-wage jobs, increase hours of paid labour or push for higher pay. This ‘moral hazard’ (discouraging people from doing what they would otherwise wish to do) has a treble cost: the continuation of dependence on low state benefits, the economic output foregone, and the loss of tax and national (social) insurance contributions that would flow into national coffers. The current means-tested system also creates a huge immoral hazard, tempting people in and around the precariat to enter the black economy, thereby avoiding tax and national insurance contributions altogether.


pages: 261 words: 86,905

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

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, asset allocation, Basel III, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamond, Bretton Woods, BRICs, business cycle, 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, fear index, financial engineering, financial innovation, Flash crash, forward guidance, Garrett Hardin, Gini coefficient, Glass-Steagall Act, global reserve currency, high net worth, High speed trading, hindsight bias, hype cycle, income inequality, inflation targeting, interest rate swap, inverted yield curve, Isaac Newton, Jaron Lanier, John Perry Barlow, joint-stock company, joint-stock limited liability company, junk bonds, Kodak vs Instagram, Kondratiev cycle, Large Hadron Collider, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, low interest rates, 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, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Ponzi scheme, precautionary principle, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, trickle-down economics, two and twenty, Two Sigma, Tyler Cowen, Washington Consensus, wealth creators, working poor, yield curve

We know that for sure because of the Herfindahl-Hirschman index, a rather groovy way of putting a numerical value on the concentration of monopoly power. moral hazard A term most people had never heard before the financial crisis of 2008, but it was used so often during the crisis that we all got sick of it. There is moral hazard when there is an economic structure that does not penalize, and at worst actively encourages, reckless behavior. Bailing out the banks, for instance, creates a classic form of moral hazard, because it exempts those banks from the consequences of their mistakes. Perhaps the most spectacular example during the credit crunch was the bailout/nationalization of AIG, the company that had insured most of the world’s credit default swaps, and as a result was on the brink of going broke.

Banks had taken out insurance with AIG, and there was a case to be made for punishing them for being so stupid. Instead AIG got its bailout, which mainly involved direct transfers of cash to the banks that were its counterparties. The banks suffered no consequences for their mistakes, and so had no incentives to avoid such mistakes in the future—a textbook example of moral hazard. It was worry about moral hazard that made the Bank of England slow to act when the first signs of the credit crunch appeared with the collapse of the bank Northern Rock in autumn 2007. The term is close to being an example of reversification, but perhaps it’s more like a simple obfuscation: what we’re really talking about is the bad guys getting away with it.


pages: 276 words: 82,603

Birth of the Euro by Otmar Issing

accounting loophole / creative accounting, behavioural economics, Bretton Woods, business climate, business cycle, capital controls, central bank independence, currency peg, currency risk, financial innovation, floating exchange rates, full employment, inflation targeting, information asymmetry, labour market flexibility, labour mobility, low interest rates, market fundamentalism, money market fund, moral hazard, oil shock, open economy, price anchoring, price stability, purchasing power parity, reserve currency, Robert Solow, Y2K, yield curve

In a single currency area, the political benefit from deficit spending (gaining votes) is enjoyed by national players, while the potential negative effects in the form of higher interest rates (due to increased government borrowing) are felt by all member states. Thus the resistance to deficit spending is reduced, and the propensity to pursue an (inappropriate) expansionary fiscal policy increases – a typical case of what is known as moral hazard. In the consultations on the constitution for the future monetary union, this problem could not be disregarded. On the one hand, a ‘European government’ with corresponding powers was not an option. The national governments (and parliaments) would basically retain their fiscal policy sovereignty.

This in turn supports expectations of macroeconomic stability and makes the task of the single monetary policy oriented towards maintaining price stability easier. 14 See ECB, ‘Fiscal policies and financial markets’, Monthly Bulletin, February 2006. 196 • The central bank and monetary policy in EMU 2. The rules must lead to sustainable budget policies in the member states and offer protection against moral hazard. As the sanction imposed by the market (interest rates) is insufficient, precautions must be taken so that the case of sovereign insolvency due to over-indebtedness never arises and the no-bail-out principle is never put to the test. 3. While committing governments to a sound budget policy, the rules must also strengthen the incentives for structural reforms to promote employment and growth. 4.

This risk would always arise, for example, if the central bank, counting on a restrictive fiscal policy stance, committed itself to an expansionary monetary policy. Even if some governments kept their ‘promises’, it would be most unlikely that all governments (and parliaments) would do so. There would, at any rate, be a high risk of moral hazard. To judge from the experience with the Stability and Growth Pact, it would most certainly be unwise to subject the ECB’s monetary policy to such ‘tests’. In the end, monetary policy would be blamed for having sacrificed its own objective of price stability to the interests of the other stakeholders.


pages: 411 words: 108,119

The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

"World Economic Forum" Davos, Alan Greenspan, An Inconvenient Truth, Andrei Shleifer, availability heuristic, bank run, behavioural economics, Black Swan, business cycle, Cass Sunstein, classic study, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, iterative process, Kenneth Arrow, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, money market fund, moral hazard, mortgage debt, Oklahoma City bombing, Pareto efficiency, Paul Samuelson, placebo effect, precautionary principle, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, social discount rate, source of truth, statistical model, stochastic process, subprime mortgage crisis, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning, Vilfredo Pareto

Another challenge is that badly designed insurance contracts can discourage investments in loss prevention or even encourage negligent behavior (“If I know I’m protected anyway, I can take more risk”), commonly referred to in economics as moral hazard or in the climate community as maladaptation. As a remedy, index-based contracts, by decoupling losses and claims, avoid moral hazard and can provide strong incentives for risk-reducing interventions and lifestyle changes. Two of my earlier examples illustrate this: In Mongolia, insured herders will face increasing premiums as climate change worsens weather conditions, giving them an added incentive to change their livelihood if animal husbandry becomes unproductive; and in Mexico, government officials will face higher interest on their catastrophe bonds by not taking measures to reduce risks to public infrastructure.

CONCLUSION: REFRAMING THE DISCUSSION AS A PREREQUISITE FOR REFORM It is no secret that the current (and long-standing) federal approach to financing disaster losses is far from perfect. Since disaster risk is spread unevenly across the country, financing federal relief out of general revenues involves large cross-subsidies, from low-risk to high-risk areas. Many critics claim, moreover, that generous federal relief creates a large “moral hazard” problem, ensuring greater losses over the long term by encouraging building in hazard-prone areas and generally reducing incentives for investment in preventive measures. Nor is there any lack of good policy alternatives. One reasonable option would be to make private disaster insurance mandatory and to create a federal reinsurance program, allowing private insurers to transfer some portion of the risk to the government reinsurance agency, in return for an appropriate premium.

It is clear and reasonable that different individuals have access to different information; they have varying life experiences and varying opportunities to make observations. A number of economists came to stress this concept from varying points of view; I myself came to it by considering the economics of medical care (Arrow, 1963).4 Insurance companies had long understood the consequences of asymmetry of information under such headings as moral hazard and adverse selection. It is not always recognized that the most neoclassical approaches in economics also assume asymmetry of information. It is a standard claim for the usefulness of a system of markets that it requires an individual to know only his or her own utility function and production possibilities.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Alan Greenspan, balance sheet recession, bank run, banking crisis, barriers to entry, Bear Stearns, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, bond market vigilante , Bretton Woods, British Empire, business cycle, 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, currency risk, 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, Goodhart's law, Greenspan put, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, junk bonds, Kenneth Rogoff, Kickstarter, labour market flexibility, Les Trente Glorieuses, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, market clearing, Martin Wolf, Minsky moment, Money creation, 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, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, Suez crisis 1956, 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

Creditors tend to believe that a borrower should honour his debts as a matter of principle; ‘they hired the money, didn’t they?’ as 1920s US President Calvin Coolidge remarked when faced with his allies’ requests to reschedule First World War debts. The idea that borrowers should be allowed to escape is one example of ‘moral hazard’ in economics. Let the borrowers believe they will be rescued from their folly, the tone implies, and they will never meet their responsibilities. The concept of moral hazard persuaded the US authorities not to rescue the investment bank Lehman Brothers in September 2008, a decision that almost brought the global financial system to a halt. The debtors also appeal to morality. They argue that creditors demand too high a price for lending money.

Indeed, even if White had been sympathetic to Keynes’s ambitions, he had to deal with congressional opposition to a large US commitment. One newspaper feared that ‘Uncle Sam would be treated as an Uncle Sap for the rest of the world’.3 The concept of a domestic lender of last resort had always been dogged by moral hazard. What was to stop a bank from taking excessive risks if it believed the central bank stood behind it? The same was true at the international level. Would the IMF act as a sugar daddy to deficit nations and prevent them from making the required policy changes to address their own problems? The initial proposal of Keynes was for a ‘clearing union’ in which international trade balances would be settled.

The relationship between central banks, markets and debt levels has already been mentioned; when markets falter central banks cut interest rates, thus encouraging investors to take more risk. There is also another spiral at work involving banks and governments. Governments support banks, so banks get bigger, requiring more government support. One study found that deposit insurance schemes increased fourfold, relative to GDP, in the wake of a financial crisis.16 This leads to a ‘moral hazard’ problem. Depositors have no incentive to monitor the health of their banks since governments stand behind them and will guarantee their deposits. That was how British savers became exposed to an Icelandic bank. Banks ceased to compete on safety. Instead they competed to attract shareholders by the size of their profits, creating the incentive to take more risk.


pages: 357 words: 107,984

Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic---And Prevented Economic Disaster by Nick Timiraos

"World Economic Forum" Davos, Alan Greenspan, asset-backed security, banking crisis, Bear Stearns, Bernie Sanders, bitcoin, Black Monday: stock market crash in 1987, Bonfire of the Vanities, break the buck, central bank independence, collapse of Lehman Brothers, collective bargaining, coronavirus, corporate raider, COVID-19, credit crunch, cryptocurrency, Donald Trump, fear index, financial innovation, financial intermediation, full employment, George Akerlof, George Floyd, global pandemic, global supply chain, Greta Thunberg, implied volatility, income inequality, inflation targeting, inverted yield curve, junk bonds, lockdown, Long Term Capital Management, low interest rates, managed futures, margin call, meme stock, money market fund, moral hazard, non-fungible token, oil shock, Phillips curve, price stability, pushing on a string, quantitative easing, Rishi Sunak, risk tolerance, rolodex, Ronald Reagan, Savings and loan crisis, secular stagnation, Skype, social distancing, subprime mortgage crisis, Tesla Model S, too big to fail, unorthodox policies, Y2K, yield curve

But the Fed will in fact be better off if the public recognizes that its leaders are regular people who will err—and that society cannot count on them to correct politicians’ mistakes or broader social ills.6 The Fed’s actions almost certainly exacerbated a moral hazard that could lead investors to take more risks in the future, particularly if glaring fragilities in financial markets are not addressed. If moral hazard does indeed inculcate riskier behavior, it may not be evident for a long time. The 2020 panic exposed semi-predictable deficiencies in the shadow banking system—a catchall term that describes asset managers, hedge funds, and other institutions that provide bank-like services.

Robert Glauber, a Harvard academic whom Powell reported to, came down firmly on one side: he hated bailouts. Powell huddled with Fed governor John LaWare at a Treasury Department conference room where Glauber pounded the table and insisted the depositors take a haircut and pay for the sins of the bank. If we always run to the rescue, he said, it creates a “moral hazard”—a term the insurance industry uses to refer to people who take risks knowing they’re protected against larger losses. After Glauber got off his soapbox, LaWare calmly laid out the Fed’s line: “You’re the government, and you can do whatever you want, but here’s what we think will happen if we haircut uninsured depositors.

Central banks, cautious by nature, don’t attract risk-takers; central bankers prefer to take time to see if one, two, or three days of wild market swings might fade. What’s more, taking bold steps sometimes risked bailing out sophisticated investors who had knowingly made highly leveraged, risky bets. It was the same “moral hazard” rationale used to argue against the bailout of the Bank of New England in 1991. It’s not the Fed’s job to keep them from losing money, one Fed staff director warned. Are we really going to go bail out hedge funds that knew they were taking on more risk when they invested in off-the-run Treasury securities?


pages: 464 words: 139,088

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

Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, behavioural economics, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, classic study, 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 engineering, financial innovation, financial intermediation, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Glass-Steagall Act, Great Leap Forward, Hyman Minsky, inflation targeting, invisible hand, Japanese asset price bubble, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, low interest rates, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, no-fly zone, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Solow, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

The provision of insurance without a proper charge is an incentive to take excessive risks – in modern jargon, it creates ‘moral hazard’. Both Bagehot and Hankey were right, in their own way. Once a panic has started, the provision of liquidity to others can prevent widespread contagion. But the design of the LOLR mechanism must be thought through carefully beforehand in order to avoid incentives to excessive risk-taking. As time passed, it became easier to flood the system with liquidity when problems arose than to design a framework that would counter moral hazard. If Bagehot’s ideas grew out of his study of earlier financial crises, can we too learn from financial episodes after 1866?

The system in place before the crisis provided many incentives for banks to structure themselves in a way that made a crisis more likely – and that is exactly what concern about ‘moral hazard’ means. Standing ready to do whatever it takes to keep the financial system functioning is not enough. The system itself has to be designed carefully in order to reduce the frequency and severity of crises. There is a case for the provision of catastrophic insurance – but not unconditionally and not in the way that was forced on policy-makers in the circumstances of 2008. Some commentators have taken issue with concerns about moral hazard, arguing, by analogy, that fire departments put out fires started by people who smoke in bed.

It allows banks and other financial intermediaries to choose for themselves the structure of their balance sheet and how to relate particular types of assets to the structure of their liabilities. In so doing, it offers a way of promoting competition in the financial sector while restricting the degree of alchemy. Compared with the Chicago Plan, it lowers the cost of eliminating bank runs. Fourth, it solves the moral hazard problem associated with the conventional lender of last resort. Banks will be required to take out insurance in the form of pre-positioned collateral with the central bank, so that, when required, liquidity can be provided quickly and cheaply on demand. There will be no need to apply a penalty rate on lending during a crisis because the disincentive to rely on the provision of central bank liquidity is provided by the haircuts on collateral.


Money and Government: The Past and Future of Economics by Robert Skidelsky

"Friedman doctrine" OR "shareholder theory", Alan Greenspan, anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, book value, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, fake news, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Glass-Steagall Act, Goodhart's law, Growth in a Time of Debt, guns versus butter model, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, Kondratiev cycle, labour market flexibility, labour mobility, land bank, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, long and variable lags, low interest rates, market clearing, market friction, Martin Wolf, means of production, Meghnad Desai, Mexican peso crisis / tequila crisis, mobile money, Modern Monetary Theory, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, nudge theory, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, placebo effect, post-war consensus, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, technological determinism, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

The attempt in the 1970s to control inflation by wage and price controls led directly to a ‘crisis of governability’, as trade unions, particularly in Britain, refused to accept them. Large state subsidies to producer groups, both public and private, fed the typical corruptions of behaviour identified by the New Right: rent-seeking, moral hazard and free-riding. Palpable evidence of government failure obliterated earlier memories of market failure. The new generation of economists abandoned Keynes and, with the help of sophisticated mathematics, reinvented the classical economics of the self-correcting market. Battered by the crises of the 1970s, governments caved in to the ‘inevitability’ of free market forces.

To ensure the necessary trust, creditors have always created as many obstacles to default as government or convention allow. They have kept interest rates as high as possible against risk of default. They have imprisoned or enslaved defaulting debtors, or taken their property. They have invaded, or refused loans to, states that repudiate their debts. Economists talk of the ‘moral hazard’ of making life too easy for debtors. The more cynical see loans to impecunious debtors as a kind of asset-stripping, a substitute for armies to obtain land and resources. However, the debtor position is not without moral support. All religions have supported ‘debt forgiveness’ and abhorred ‘debt-bondage’.

Moreover, it was in the second half of the nineteenth century that the Bank of England started to develop its modern function as ‘lender of last resort’ to the banking system, a duty codified in Walter Bagehot’s 1873 classic, Lombard Street. Bagehot argued that it was the Bank’s duty to keep large-enough reserves to be able, in a crisis, to lend freely to all solvent banks at a very high rate of interest. Widely resisted at the time on the high ground of ‘moral hazard’, it led to the Bank organizing the rescue of Barings in 1890. This was the doctrine that the US Federal Reserve signally failed to apply in the Lehman Brothers crisis of September 2008, and which the European Central Bank was debarred by law from applying in the European banking crisis that followed.


Big Data and the Welfare State: How the Information Revolution Threatens Social Solidarity by Torben Iversen, Philipp Rehm

23andMe, Affordable Care Act / Obamacare, algorithmic bias, barriers to entry, Big Tech, business cycle, centre right, collective bargaining, COVID-19, crony capitalism, data science, DeepMind, deindustrialization, full employment, George Akerlof, income inequality, information asymmetry, invisible hand, knowledge economy, land reform, lockdown, loss aversion, low interest rates, low skilled workers, microbiome, moral hazard, mortgage debt, Network effects, new economy, obamacare, personalized medicine, Ponzi scheme, price discrimination, principal–agent problem, profit maximization, Robert Gordon, speech recognition, subprime mortgage crisis, tail risk, The Market for Lemons, The Rise and Fall of American Growth, union organizing, vertical integration, working-age population

Every worker faced the risk of falling ill and thus forgoing wages that were essential to their families’ welfare, so this was an important matter for all workers (Andersson and Eriksson 2017). As a result, there was widespread willingness to pay into sickness funds, and many were successfully set up. Moral hazard, which is an otherwise serious problem when it comes to illness, could usually be dealt with through community monitoring and peer pressure (checking on colleagues failing to show up at work, requiring doctors’ notes, etc.). Gottlieb notes that “intrusive monitoring and social pressure may have been an effective way of mitigating moral hazard” (2007, 278), and such monitoring can be seen as an extension of MASs “fraternizing” function (which sometimes turned abusive).

In addition, some risks are correlated across individuals, which violate actuarially sound insurance principles. Unemployment, which is subject to macroeconomic shocks, is an example. This does not rule out private providers, but it does require the state to be an “insurer of last resort,” which itself leads to problems of moral hazard. For these reasons, the transition to a private system is by no means a foregone conclusion in a high-information environment. Yet privatization and public sector marketization enter the political debate in a way not seen in a low-information environment. methods and evidence A study of the consequences of more and better information about individual risks faces the obvious problem that most of such information is private and protected by privacy policies.

In addition, the fund was built up gradually and resembled fully funded retirement schemes in the sense that most collected benefits only after a life of contributions. The fund was designed for future, not current, widows and orphans. This gradualism, and the fact that life expectancy did not vary very much among ministers, prevented what we referred to in the previous chapter as the timeinconsistency problem. Moral hazard was also not a problem: most ministers led ascetic lives and had no reason or proclivity to put their own lives at risk. 1 The foundations of actuarial science were being established simultaneously in England and were explained for the first time by James Dodson in his “First Lecture on Insurances” in 1756 (Brackenridge and Brown 2006).


pages: 620 words: 214,639

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan

Alan Greenspan, asset-backed security, Bear Stearns, book value, call centre, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deal flow, Deng Xiaoping, diversification, Financial Instability Hypothesis, fixed income, Glass-Steagall Act, Hyman Minsky, Irwin Jacobs, Jim Simons, John Meriwether, junk bonds, Long Term Capital Management, low interest rates, margin call, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, mutually assured destruction, Myron Scholes, New Journalism, Northern Rock, proprietary trading, Renaissance Technologies, Rod Stewart played at Stephen Schwarzman birthday party, Savings and loan crisis, savings glut, shareholder value, sovereign wealth fund, stock buybacks, too big to fail, traveling salesman, uptick rule, vertical integration, Y2K, yield curve

—Brutus to Julius Caesar, Act I, Julius Caesar, William Shakespeare, circa 1600 CONTENTS PART I / HOW IT HAPPENED: TEN DAYS IN MARCH CHAPTER 1 / The Ultimate Roach Motel CHAPTER 2 / The Confidence Game CHAPTER 3 / “Bear Stearns Is Not in Trouble!” CHAPTER 4 / The Run on the Bank CHAPTER 5 / The Armies of the Night CHAPTER 6 / Feeding Frenzy CHAPTER 7 / Total Panic CHAPTER 8 / The Price of Moral Hazard? $2 CHAPTER 9 / The Fed Comes to the Rescue (After the Battle Is Over) CHAPTER 10 / Mooning at the Wake CHAPTER 11 / “New Developments from Hell” CHAPTER 12 / “We're the Bad Guys” PART II / WHY IT HAPPENED: EIGHTY-FIVE YEARS CHAPTER 13 / Cy CHAPTER 14 / Ace CHAPTER 15 / Jimmy CHAPTER 16 / May Day CHAPTER 17 / Haimchinkel Malintz Anaynikal CHAPTER 18 / The Joy of Mortgage-Backed Securities CHAPTER 19 / “Bullies Always Cave” CHAPTER 20 / The Math Whiz and the Baseball Star CHAPTER 21 / “We're All Going to a Picnic and the Tickets Are $250 Million Each” CHAPTER 22 / The Fish Rots from the Head PART III / THE END OF THE SECOND GILDED AGE CHAPTER 23 / The 10-in-10 Strategy CHAPTER 24 / Cayne CAPs Spector CHAPTER 25 / Cioffi's Bubble CHAPTER 26 / “The Entire Subprime Market Is Toast” CHAPTER 27 / “If There's Fraud, We're Gonna Pay” CHAPTER 28 / A Very Stupid Decision CHAPTER 29 / Nashville CHAPTER 30 / The Cayne Mutiny CHAPTER 31 / Desperate Times Call for Hare-Brained Schemes Epilogue: The Deluge Notes Acknowledgments HOW IT HAPPENED: TEN DAYS IN MARCH THE ULTIMATE ROACH MOTEL he first murmurings of impending doom for the financial world originated 2,500 miles from Wall Street in an unassuming office suite just north of Orlando, Florida.

He said that while everyone was “taken aback” by the $10 deal, there was also a feeling of resignation: “It is what it is. Let's go get this done. Let's go do what we have to do to get done here.” People started trickling home after midnight on Saturday, somewhat confident that a deal with JPMorgan would coalesce the next day before the deadline. THE PRICE OF MORAL HAZARD? $2 n Sunday morning at around eight-thirty, Bear's team of fifty professionals reassembled in the thirteenth-floor conference center. Schwartz kicked off the day by telling everyone how it “was going to unfold,” explained one participant, “but people were not in a good mood.” Bear's lawyers had received a draft of a proposed merger agreement from Wachtell, Lipton, JPMorgan's lawyers, as well as a draft of an option agreement that would allow JPMorgan to buy a large chunk of Bear Stearns's stock.

But on Sunday morning, when Paulson appeared on ABC's This Week, he gave no indication how high the stakes had been increased since the Fed stepped in on Friday morning. He dutifully defended that decision when asked about it by George Stephanopoulos. “The right decision here, I am convinced, was the decision the Fed made, which was to do things, work with market participants, to minimize the disruptions.” He said he was “very aware of moral hazard. But our primary concern right now—my primary concern—is the stability of our financial system.” When Stephanopoulos asked Paulson if the Fed's back-to-back loan to Bear Stearns had solved the problem, Paulson used evasive tactics, even though he knew full well that the situation was then at its most flammable.


pages: 206 words: 70,924

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

Abraham Wald, Albert Einstein, Bayesian statistics, Bear Stearns, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial engineering, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, Myron Scholes, Paul Samuelson, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk free rate, risk tolerance, risk/return, Robert Solow, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, Thales and the olive presses, Thales of Miletus, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

To prevent the bankruptcy of one of the largest companies in the country, the US government supplied $182.5 billion in credit to the company in what constituted, at the time, the largest corporate bailout in history.1 Of course, the danger of privatized profits but socialized losses in insurable activities is the moral hazard problem. The Black-Scholes equation assumes that the random walk of log-normal values follows a log-normal distribution. This is a symmetric distribution, and assumes that upside and downside risk are equally likely consequences of external forces. When the insured entity can affect the risk profile and hence increase its probability of crossing the exercise threshold, the Black-Scholes estimate of efficient options pricing is biased. In essence, the insured can purchase the option too cheaply, or, in the case of moral hazard, exhibit insufficient prudence because of the protection of insurance.

In an era of investment banks too big to be allowed to fail, if a market suddenly seizes and prevents investors from unwinding, they may find themselves owing hundreds of billions of dollars, as AIG had discovered. In such a case, in which companies keep their profits in good times but must be bailed out to prevent even greater financial catastrophe in bad times, the financial system creates the moral hazard problem of privatized gains and socialized losses. Scholes agreed that the reality in which finance found itself by 2007 was problematic. Scholes proposed that the financial system should be deleveraged. However, he acknowledged the difficulty of such a proposal. If investors must establish a safer balance between assets controlled and the capital invested, then a large portion of their securities assets would have to be sold.

During the unwinding of Long Term Capital Management, the New York Fed was involved in its first huge financial company bailout of a financial company deemed too big to fail. It would not be its last. At the time, as in the aftermath of even larger bailouts in 2008 and 2009, some expressed grave concern that to bail out firms deemed too big to fail encouraged similarly positioned firms to take inordinate risks. Suddenly, the insurance concept of moral hazard had entered the finance lexicon. In the aftermath, executives of related companies were forced to resign by their boards. Goldman Sachs CEO Jon Corzine was ousted in a board-level effort organized by future Treasury Secretary Henry Paulson. Corzine went into politics and represented New Jersey in the US Senate, then led the large investment bank MF Global to its dramatic demise as it illegally comingled its customer’s funds with its proprietary investment fund and lost hundreds of millions of dollars.


pages: 193 words: 11,060

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

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, banking crisis, Bear Stearns, collapse of Lehman Brothers, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, Glass-Steagall Act, index fund, invisible hand, junk bonds, light touch regulation, margin call, Michael Milken, moral hazard, Nick Leeson, Northern Rock, proprietary trading, 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, two and twenty, zero-sum game

Calculated as the discount rate that makes the net present value of all future cash flows zero Investment banking: providing specialist investment banking services, including capital markets activities and M&A advice, to large clients (corporations and institutional investors) Glossary xi Investment banking adviser: see Adviser Islamic banking: banking structured to comply with Shariah (Islamic) law Junior debt: debt that is subordinated or has a lower priority than other debt Junk bond: see High yield bond Lenders: providers of debt finance Leverage: debt Leveraged acquisition: acquisition of a company using high levels of debt to finance the acquisition LIBOR: London Inter-Bank Offered Rate, the rate at which banks borrow from other banks Liquidity: capital required to enable trading in capital markets M&A: mergers and acquisitions; typically the major advisory department in an investment bank Market abuse: activities that undermine efficient markets and are proscribed under legislation Market capitalism: a system of free trade in which prices are set by supply and demand (and not by the Government) Market maker: a market participant who offers prices at which it will buy and sell securities Mis-selling: inaccurately describing securities (or other products) that are being sold Moral hazard: the risk that an action will result in another party behaving recklessly Moral relativism: the concept that morals and ethics are not absolute, and can vary between individuals Multi-notch downgrade: a significant downgrade in rating or recommendation (by a rating agency) Natural law: the concept that there is a universal moral code Net assets: calculated as total assets minus total liabilities Net present value (NPV): sum of a series of cash inflows and outflows discounted by the return that could have been earned on them had they been invested today NYSE: New York Stock Exchange Operating profit: calculated as revenue from operations minus costs from operations P:E: ratio used to value a company where P (Price) is share price and E (Earnings) is earnings per share Price tension: an increase in sales price of an asset, securities or a business resulting from a competitive situation in an auction xii Glossary Principal: equity investor in a transaction Principal investment: proprietary investment Private equity: equity investment in a private company Private equity fund: investment funds that invest in private companies Proprietary investment: an investment bank’s investment of its own capital in a transaction or in securities Qualifying instruments: securities covered by legislation Qualifying markets: capital markets covered by legislation Quantitative easing: Government putting money into the banking system to increase reserves Regulation: legal governance framework imposed by legislation Restructuring: investment banking advice on the financial restructuring of a company unable to meet its (financial) liabilities Returns: profits Rights-based ethics: ethical values based on the rights of an individual, or an organisation SEC: the Securities and Exchange Commission, a US regulatory authority Sarbanes–Oxley: the US “Company Accounting Reform and Investor Protection Act” Senior debt: debt that takes priority over all other debt and that must be paid back first in the event of a bankruptcy Shariah finance: financing structured in accordance with Shariah or Islamic law Sovereign debt: debt issued by a Government Speculation: investment that resembles gambling; alternatively, very short-term investment without seeking to gain management control Socially responsible investing (SRI): an approach to investment that aims to reflect and/or promote ethical principles Spread: the difference between the purchase (bid) and selling (offer) price of a security Subordinated debt: see Junior debt Syndicate: group of banks or investment banks participating in a securities issue Syndication: the process of a group of banks or investment banks selling a securities issue Takeover Panel: UK authority overseeing acquisitions of UK public companies Too big to fail: the concept that some companies or sectors are too large for the Government to allow them to become insolvent Glossary xiii Unauthorised trading: trading on behalf of an investment bank or other investor without proper authorisation Universal bank: an integrated bank Utilitarian: ethical values based on the end result of actions, also referred to as consequentialist Volcker Rule: part of the Dodd–Frank Act, restricting the proprietary investment activities of deposit-taking institutions Write-off: reduction in the value of an investment or loan Zakat: charitable giving, one of the five pillars of Islam This page intentionally left blank 1 Introduction: Learning from Failure There has been significant criticism of the ethics of the investment banking sector following the financial crisis.

The UK’s Independent Commission on Banking stated that too big to fail “constitutes a perceived acceptance of risk by the state . . . . with the potential for the related rewards to be enjoyed by the private sector”. This is described, in their Call for Evidence, as “inequitable” and “creating moral hazard incentives for poor decision making”.6 Ethical duties and the implicit Government guarantee The duty that investment banks owe to their Governments is affected by the implicit guarantee from Governments to support the financial markets. Investment banks have benefitted from this during the financial crisis – the liquidity crisis in the markets would have brought markets to some form of collapse without Government intervention.

Consequently, while markets can be “efficient” and it is understood that all participants are seeking to profit, there can also be unequal economic outcomes to market activity (one counterparty may profit and another lose from a trade). Preventing outcomes where some participants incur losses may be an attractive ideal, but it is not practical and not ethically required. It also gives rise to moral hazards. If an investment bank is by its nature a market counterparty, and is expected by its customers and the market operators to take risks, it is difficult to expect the investment bank to behave towards all market counterparties as if they are clients, and to act so as to always protect its counterparties’ interests.


pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

airline deregulation, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, bond market vigilante , Bretton Woods, business cycle, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Glass-Steagall Act, Gordon Gekko, high-speed rail, Hyman Minsky, income inequality, inflation targeting, invisible hand, it is difficult to get a man to understand something, when his salary depends on his not understanding it, It's morning again in America, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Joseph Schumpeter, junk bonds, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, low skilled workers, Mark Zuckerberg, Minsky moment, Money creation, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, Paul Samuelson, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Savings and loan crisis, Upton Sinclair, We are all Keynesians now, We are the 99%, working poor, Works Progress Administration

If you’ve ever seen the movie It’s a Wonderful Life, which features a run on Jimmy Stewart’s bank, you might be interested to know that the scene is completely anachronistic: by the time the supposed bank run takes place, that is, just after World War II, deposits were already insured, and old-fashioned bank runs were things of the past. On the other side, Glass-Steagall limited the amount of risk banks could take. This was especially necessary given the establishment of deposit insurance, which could have created enormous “moral hazard.” That is, it could have created a situation in which bankers could raise lots of money, no questions asked—hey, it’s all government-insured—then put that money into high-risk, high-stakes investments, figuring that it was heads they win, tails taxpayers lose. One of the first of many deregulatory disasters came in the 1980s, when savings and loan institutions demonstrated, with a vengeance, that this kind of taxpayer-subsidized gambling was more than a theoretical possibility.

It reduces their exposure to changes in the housing market and in interest rate levels. This in turn will make the thrift industry a stronger, more effective force in financing housing for millions of Americans in the years to come. But it didn’t work out that way. What happened instead was that deregulation created a classic case of moral hazard, in which the owners of thrifts had every incentive to engage in highly risky behavior. After all, depositors didn’t care what their bank did; they were insured against losses. So the smart move for a banker was to make high-interest-rate loans to dubious borrowers, typically real estate developers.

academic sociology, 92, 96, 103 AIG, 55 airlines, deregulation of, 61 Alesina, Alberto, 196–99 American Airlines, 127 American Recovery and Reinvestment Act (ARRA): cost of, 121 inadequacy of, 108, 109–10, 116–19, 122–26, 130–31, 212, 213 Angle, Sharron, 6 anti-Keynesians, 26, 93–96, 102–3, 106–8, 110–11, 192 Ardagna, Silvia, 197–99 Argentina, 171 Arizona, housing bubble in, 111 Asian financial crisis of 1997–98, 91 asset-backed securities, 54, 55 auction rate securities, 63 Austerians, 188–207 creditors’ interests favored by, 206–7 supposed empirical evidence of, 196–99 austerity programs: alarmists and, 191–95, 224 arguments for, 191–99 economic contraction and, 237–38 in European debt crisis, 46, 144, 185, 186, 188 as ineffective in depressions, xi, 213 state and local governments and, 213–14, 220 unemployment and, xi, 189, 203–4, 207, 237–38 Austrian economics, 150 automobile sales, 47 babysitting co-op, 26–28, 29–30, 32–33, 34 Bakija, Jon, 78 balance of trade, 28 Ball, Laurence, 218 Bank for International Settlements (BIS), 190, 191 Bank of England, 59 Bank of Japan, 216, 218 bankruptcies, personal, 84 bankruptcy, 126–27 Chapter 11, 127 banks, banking industry: capital ratios in, 58–59 complacency in, 55 definition of, 62 deregulation of, see deregulation, financial European, bailouts of, 176 government debt and, 45 “haircuts” in, 114–15 incomes in, 79–80 lending by, 30 money supply and, 32 moral hazard in, 60, 68 1930s failures in, 56 origins of, 56–57 panics in, 4, 59 political influence of, 63 receivership in, 116 regulation of, 55–56, 59–60, 100 repo in, 62 reserves in, 151, 155, 156 revolving door in, 86, 87–88 risk taking in, see risk taking runs on, 57–58, 59, 60, 114–15, 155 separation of commercial and investment banks in, 60, 62, 63 shadow, 63, 111, 114–15 unregulated innovations in, 54–55, 62–63, 83 Barro, Robert, 106–7 Bebchuck, Lucian, 81 Being There (film), 3 Bernanke, Ben, 5, 10–11, 32, 76, 104, 106, 151, 157, 159–60, 210 recovery and, 216–19 on 2008–09 crisis, 3–4 “Bernanke Must End Era of Ultra-low Rates” (Rajan), 203–4 Black, Duncan, 190 Blanchard, Olivier, 161–63 Bloomberg, Michael, 64 BNP Paribas, 113 Boehner, John, 28 bond markets: interest rates in, 132–41, 133 investor confidence and, 132, 213 bonds, high-yield (junk bonds), 115, 115 bond vigilantes, 125, 132–34, 138, 139, 140 Bowles, Erskine, 192–93 Brazil, 171 breach of trust, 80 Bretton Woods, N.H., 41 Broder, David, 201 Brüning, Heinrich, 19 Buckley, William F., 93 Bureau of Labor Statistics, U.S.


pages: 554 words: 158,687

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, false flag, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, general purpose technology, Glass-Steagall Act, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low interest rates, low skilled workers, M-Pesa, market bubble, means of production, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, post-Fordism, Post-Keynesian economics, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Solow, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

Consequently the relationship between borrower and lender takes the contractual form of the lender advancing money to the borrower for a given period of time in exchange for a proportionately fixed share of the proceeds from the project (interest).8 The lender must also practise information collection and monitoring of the borrower in order, first, to minimize the chances of the borrower undertaking fraudulent or careless action (moral hazard) and, second, to avoid attracting disproportionate numbers of poor quality borrowers (adverse selection). The outcome of moral hazard and adverse selection could be the rationing of credit actually provided by lenders, and hence the failure of credit markets to clear.9 In this light, banks and other financial institutions are providers of services that presumably improve the efficiency of the interaction between borrowers and lenders.

Participants in capitalist markets presumably have to bear the consequences of their own decisions. If it is necessary for financial markets occasionally to receive wholesale provision of liquidity from the state, it follows that markets produce suboptimal results, while participants are protected from their own actions by publicly backed liquidity. Consequently, moral hazard is an inherent outcome of the function of lender of last resort. The second component of generic market-negating regulation is deposit insurance guarantees. The practice emerged already in the late nineteenth century, and can take a variety of legal forms – private and public as well as explicit and implicit.

If deposit holders converged on a bank demanding cash, the bank would go bankrupt irrespective of its profitability, of the quality of its assets, and so on. Public guarantees prevent or ameliorate bank runs by re-establishing trust in banks among the public. It is apparent that public deposit insurance guarantees represent market-negating regulation since they effectively lower the cost of liabilities for banks. But they also create moral hazard since, on the one hand, some of the liabilities of banks are publicly protected and, on the other, deposit holders need not ultimately monitor the performance of banks. By this token, deposit insurance guarantees raise the profitability of banks, other things equal. The third and most striking aspect of market-negating regulation in the course of financialization, however, has been the gradual prevalence of the principle of ‘too big to fail’ among financial institutions.


Termites of the State: Why Complexity Leads to Inequality by Vito Tanzi

accounting loophole / creative accounting, Affordable Care Act / Obamacare, Alan Greenspan, Andrei Shleifer, Andrew Keen, Asian financial crisis, asset allocation, barriers to entry, basic income, behavioural economics, bitcoin, Black Swan, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, clean water, crony capitalism, David Graeber, David Ricardo: comparative advantage, deindustrialization, Donald Trump, Double Irish / Dutch Sandwich, experimental economics, financial engineering, financial repression, full employment, George Akerlof, Gini coefficient, Gunnar Myrdal, high net worth, hiring and firing, illegal immigration, income inequality, indoor plumbing, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jean Tirole, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labor-force participation, libertarian paternalism, Long Term Capital Management, low interest rates, market fundamentalism, means of production, military-industrial complex, moral hazard, Naomi Klein, New Urbanism, obamacare, offshore financial centre, open economy, Pareto efficiency, Paul Samuelson, Phillips curve, price stability, principal–agent problem, profit maximization, pushing on a string, quantitative easing, rent control, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Second Machine Age, secular stagnation, self-driving car, Silicon Valley, Simon Kuznets, synthetic biology, The Chicago School, The Great Moderation, The Market for Lemons, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, Tyler Cowen: Great Stagnation, universal basic income, unorthodox policies, urban planning, very high income, Vilfredo Pareto, War on Poverty, Washington Consensus, women in the workforce

The expectation that the government will intervene in the future may be influenced by its past behavior and may create what economists call “moral hazard,” which may make some institutions take greater risks than they would have otherwise. The danger created by “too big to fail” financial institutions is based on these expectations. Some institutions, and especially some banks, may become so big that the expectation that the government would not allow them to fail, because it would put a country’s economy at high risk, comes to be widely shared. This also allows some banks to get credit more cheaply, thus distorting competition. Inventory of Government Tools 139 Contingent liabilities and moral hazards may become particularly important in catastrophic events.

The socialization of the losses incurred by some very large financial enterprises has, in fact, been justified (by those who made the decisions to help them) on the grounds that, without the government rescue, the economy would risk falling into a depression similar to or worse than the one in the 1930s. As the justifiers might put it, when a house is on fire, firefighters cannot worry about the moral hazard consequences of putting out the fire! Of course, these interpretations of what might have happened might be right or wrong, and we shall never know. The same argument will be offered in probable future crises, as long as the banks and the other financial institutions remain “too big to fail.” See Bernanke (2015) and Geithner (2014) for a defense of the rescue operations in 2008–2009.

The problem is that, while governmental interventions may prevent potential, but not certain, current disasters from occurring, they also create expectations of interventions in future crises. The previous interventions, tend to create problems for future governments and for society, putting future governments at greater risk, and creating more reasons to keep the fiscal accounts in good order (see Tanzi, 2013b). The expectation of governmental intervention creates a “moral hazard” and tends to distort the operation of the free market, creating (unfair) advantages for institutions that have become “too big to be allowed to fail” and that, because of their size, have come to expect being rescued in future crises. These institutions’ lower risks allow them to borrow more cheaply than smaller enterprises can, thus distorting the market and Modernity and Growing Termites in Market 157 increasing the likelihood of future crises and of future government interventions during crises.


pages: 741 words: 179,454

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

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Alan Greenspan, Albert Einstein, algorithmic trading, Andy Kessler, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, BRICs, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, carbon credits, Carl Icahn, 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, currency risk, Daniel Kahneman / Amos Tversky, deal flow, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Dr. Strangelove, Dutch auction, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial engineering, financial independence, financial innovation, financial thriller, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, global reserve currency, Goldman Sachs: Vampire Squid, Goodhart's law, Gordon Gekko, greed is good, Greenspan put, happiness index / gross national happiness, haute cuisine, Herman Kahn, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", job automation, Johann Wolfgang von Goethe, John Bogle, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Michael Milken, Mikhail Gorbachev, Milgram experiment, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Phillips curve, planned obsolescence, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, Reminiscences of a Stock Operator, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk free rate, risk-adjusted returns, risk/return, road to serfdom, 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, short squeeze, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, stock buybacks, survivorship bias, tail risk, Teledyne, 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 Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, two and twenty, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

No doctor or surgeon expects to or receives a tip for doing their job properly. The bonus culture encouraged moral hazard—a focus on narrowly quantifiable outcomes while ignoring wider risks and costs. Elite bankers and traders took risks with other people’s money, aware that if they won the bet they would get a significant share of profits, while suffering no permanent damage if they lost. In a comedy sketch featuring British comedians John Bird and John Fortune, the interviewer asks: “Can we talk about moral hazard?” The banker responds: “About what?” The interviewer reiterates the question: “Moral hazard?” The banker says: “I know what ‘hazard’ means, but what’s the other word?”

Banks estimate the worst-case daily change in the value of positions to cover the risk. Event risk, where the value of the position changes a lot quickly, is difficult to measure. Competition reduces the haircuts. LTCM was special, not requiring any haircut. As one observer asked: “Would hedge funds even exist without a fatty dollop of moral hazard somewhere along the great protein chain of lending?”22 At their peak, hedge funds accounted for 30–40 percent of total investment bank earnings. Citadel paid $5.5 billion in trading costs to investment banks,23 the largest portion being interest on borrowings. Citadel’s total and net assets were $166 billion and $13 billion respectively.

Rising debt drives up asset prices leading to even more debt that cannot be supported by values or income produced. The system is underpinned by faith in the competence of legislators, regulators and the chattering classes—commentators, gurus and financial journalists. Faux theories, such as Alan Greenspan and Ben Bernanke’s Great Moderation, reassure investors that old problems have been overcome. Moral hazard increases as excessive risk taking and speculation become commonplace. There are increases in beezle42—fraud or embezzlement—as sharp people take advantage of the favorable conditions and abundance of money. As Dr. Pangloss, professor of “metaphysico-theologo-cosmolo-nigology” in Voltaire’s Candide, knew: “All is for the best in the best of all possible worlds.”


pages: 328 words: 96,678

MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them by Nouriel Roubini

"World Economic Forum" Davos, 2021 United States Capitol attack, 3D printing, 9 dash line, AI winter, AlphaGo, artificial general intelligence, asset allocation, assortative mating, autonomous vehicles, bank run, banking crisis, basic income, Bear Stearns, Big Tech, bitcoin, Bletchley Park, blockchain, Boston Dynamics, Bretton Woods, British Empire, business cycle, business process, call centre, carbon tax, Carmen Reinhart, cashless society, central bank independence, collateralized debt obligation, Computing Machinery and Intelligence, coronavirus, COVID-19, creative destruction, credit crunch, crony capitalism, cryptocurrency, currency manipulation / currency intervention, currency peg, data is the new oil, David Ricardo: comparative advantage, debt deflation, decarbonisation, deep learning, DeepMind, deglobalization, Demis Hassabis, democratizing finance, Deng Xiaoping, disintermediation, Dogecoin, Donald Trump, Elon Musk, en.wikipedia.org, energy security, energy transition, Erik Brynjolfsson, Ethereum, ethereum blockchain, eurozone crisis, failed state, fake news, family office, fiat currency, financial deregulation, financial innovation, financial repression, fixed income, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, future of work, game design, geopolitical risk, George Santayana, Gini coefficient, global pandemic, global reserve currency, global supply chain, GPS: selective availability, green transition, Greensill Capital, Greenspan put, Herbert Marcuse, high-speed rail, Hyman Minsky, income inequality, inflation targeting, initial coin offering, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invention of movable type, Isaac Newton, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, junk bonds, Kenneth Rogoff, knowledge worker, Long Term Capital Management, low interest rates, low skilled workers, low-wage service sector, M-Pesa, margin call, market bubble, Martin Wolf, mass immigration, means of production, meme stock, Michael Milken, middle-income trap, Mikhail Gorbachev, Minsky moment, Modern Monetary Theory, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Mustafa Suleyman, Nash equilibrium, natural language processing, negative equity, Nick Bostrom, non-fungible token, non-tariff barriers, ocean acidification, oil shale / tar sands, oil shock, paradox of thrift, pets.com, Phillips curve, planetary scale, Ponzi scheme, precariat, price mechanism, price stability, public intellectual, purchasing power parity, quantitative easing, race to the bottom, Ralph Waldo Emerson, ransomware, Ray Kurzweil, regulatory arbitrage, reserve currency, reshoring, Robert Shiller, Ronald Reagan, Salesforce, Satoshi Nakamoto, Savings and loan crisis, Second Machine Age, short selling, Silicon Valley, smart contracts, South China Sea, sovereign wealth fund, Stephen Hawking, TED Talk, The Great Moderation, the payments system, Thomas L Friedman, TikTok, too big to fail, Turing test, universal basic income, War on Poverty, warehouse robotics, Washington Consensus, Watson beat the top human players on Jeopardy!, working-age population, Yogi Berra, Yom Kippur War, zero-sum game, zoonotic diseases

When borrowers take risks with the confidence that someone will come to their rescue, there is what economists like to call “moral hazard.” If you feel confident the government will bail you out if a risky bet fails, why not go for it? The higher the risk, the higher the potential return, and there may be no downside. If you win your bet, you get to keep all the chips; if you lose it, someone else picks up the tab and you live to bet another day. When taxpayers are on the hook, moral hazard privatizes gains and socializes losses. Ironically, there is one controversial but popular solution to high debt problems: take on yet more debt, to stimulate growth.

Emerging markets often get in trouble when the Fed hikes interest rates rapidly, or the price of exported commodities falls sharply—or both. In international courtrooms I testified for a decade to help Argentina fend off aggressive lawsuits by vulture investors after the default in 2001. When they mobilize to fix problems, government policy makers often lay the groundwork for future crises. Economists single out “moral hazard”—shorthand for economic bailouts that induce borrowers and investors to throw caution to the wind. Why worry about risk if someone else will shoulder your losses? Policy decisions have many unintended consequences, not least the subprime mortgage imbroglio that turned into the Global Financial Crisis of 2008.

If authorities tax accumulated wealth or impose lofty tax rates on super-high incomes, tax avoidance may increase and proceeds still won’t approach amounts needed to ease the global debt load. And taxing labor to reduce debt levels is often politically impossible when many workers are income strapped and already facing high tax rates. Every single remedy to high debt levels brings its own costs: the paradox of thrift, the chaos of defaults, the moral hazard of bailout, the wealth taxation that hurts the wealthy and may lead to less private capital investment, the labor taxation that hurts the most vulnerable, unexpected inflation that wipes out the wealth of creditors. That is why we have arrived at the new “consensus” of MMT, as if it were a free lunch.


pages: 318 words: 77,223

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

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, balance sheet recession, bank run, barriers to entry, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, break the buck, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, disruptive innovation, driverless car, Erik Brynjolfsson, eurozone crisis, fear index, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, geopolitical risk, 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, low interest rates, 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, Sheryl Sandberg, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

Importantly, it provided financial (loss-protected) backing for a shotgun wedding between failing Bear Stearns and solid-standing JPMorgan Chase. Central banks’ hope was that these two very sudden and disturbing shocks, together with the exceptional nature of the policy response, would entice banks to de-risk in an orderly manner. Instead, banks seemed beholden to what economists call “moral hazard”—that is, the inclination to take more risk because of the perceived backing of an effective and decisive insurance mechanism. There is perhaps no better example of this phenomenon than what Chuck Prince, the then CEO of Citigroup, one of the biggest and most closely followed banks in the world, told the Financial Times in a front-page interview.

To some, the behavior of financial markets once again showed insufficient heed paid to the important insights of Hyman Minsky, the American economist. Known for his “financial instability hypothesis,”7 Minsky argued that, in capitalist economies, periods of financial stability give rise to subsequent periods of great financial instability. The extent of underlying moral hazard became more and more notable. I remember being bemused in October 2014 by the extent to which the return of some modest market volatility caused some respected market participants to call for the Fed to come up with “QE4”—that is, yet another program of large-scale asset purchases in order to repress market volatility and artificially boost asset prices again.

But it’s a complicated argument to make and I don’t think we always made it as well as we could have.”2 Former secretary Geithner went further. Recognizing the difficulty of selling to the public the case for bailouts, he reacted quite sharply to those who suggested that such assistance to banks would encourage renewed irresponsible behavior down the road. He saw little merit for the claims of those he labeled in his book “moral hazard fundamentalists.”3 Recognizing the continued anger in the country, an active group of politicians is interested not only in de-risking the banks further but also in gaining greater insights into how their de facto main supervisor, the Federal Reserve, operates—so much so as to push an inherently nonconfrontational Chair Yellen to warn in July 2014 congressional testimony that greater Fed oversight could be a “grave mistake.”4 Yet this phenomenon will not dissipate anytime soon, especially as it unites lawmakers on both sides of the political aisle, albeit for different reasons.


pages: 370 words: 112,602

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

"World Economic Forum" Davos, 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, Kickstarter, land tenure, low interest rates, 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, tontine, urban planning

What stops people from doing more to help one another? Why are some forms of risk not covered, or not covered well? There are good reasons we may be unwilling to offer unconditional help to our friends and neighbors. For one thing, we may worry that the guarantee of help might create a temptation to slack off—this is what insurers call moral hazard. Or that people may claim that they are in need even when they are not. Or simply that the promise of mutual help may not be carried through: I help you, but when your turn comes around, you are too busy. These are all explanations for why we may want to hold back our help a little, but it is not clear whether this could explain not offering help to those who just became very sick, because falling ill is presumably not a choice.

There are of course a number of obvious difficulties with providing insurance. These problems are not specific to the poor. They are fundamental problems, but they are amplified in poor countries, where it is more difficult to regulate insurers and monitor the insured. We have already mentioned “moral hazard”: People may change their behavior (farm less carefully, spend more money on health care, and so forth) once they know that they will not bear the full consequences. Consider some of the problems of providing health insurance, for example. We have seen that even without health insurance, the poor visit some forms of health providers all the time.

A farmer should value a policy that pays him a fixed amount (based on the premium he paid) when the rainfall measured at the nearby weather station falls below a certain critical level. Because no one controls the weather and there is no judgment to be made about what should be done (unlike in medical care, where someone must decide which tests or treatment is needed), there is no scope for moral hazard or fraud. Within health care, insuring catastrophic health events—major illnesses, accidents—seems much easier than covering outpatient care. Nobody wants to have surgery or chemotherapy just for the heck of it, and the treatment is easily verified. The danger of overtreatment remains, but the insurer can cap what it will pay for each treatment.


pages: 350 words: 109,220

In FED We Trust: Ben Bernanke's War on the Great Panic by David Wessel

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Berlin Wall, Black Swan, break the buck, business cycle, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial engineering, financial innovation, financial intermediation, fixed income, full employment, George Akerlof, Glass-Steagall Act, Greenspan put, housing crisis, inflation targeting, information asymmetry, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, Michael Milken, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, price stability, quantitative easing, Robert Shiller, Ronald Reagan, Saturday Night Live, Savings and loan crisis, savings glut, Socratic dialogue, too big to fail

Well before the Lehman debacle, Taylor — who was big on making rules that guided policy — attacked Bernanke, Geithner, and Paulson for failing to explain to the markets and the public the criteria for rescuing Bear Stearns so everyone would know how the same trio planned to respond the next time a big financial house got into trouble. Most inside the Fed, though, swallowed hard and concluded Bernanke and Geithner had made the best battlefield decision possible. “There is no question we created moral hazard by doing this. But there are moral hazard extremists who think moral hazard is such a big problem that we should never do anything that creates it,” Mishkin said after returning to Columbia University’s business school. “It is unfortunate that we didn’t have more time to think about this, but the risk is that you may go into a depression if you screw it up.”

Three months after Bear Stearns, the Richmond Fed president, Jeffrey Lacker, made headlines with a denunciation of the Bernanke-Geithner rescue in a speech in London. The Fed should always move to stop irrational runs on the banks, the self-perpetuating kind where panic by some bank depositors leads to panic by many, Lacker said. But by preventing Bear Stearns from failing, the Fed was sowing the seeds of future crises. It was creating “moral hazard,” a term borrowed from the insurance business to describe the temptation to take bigger risks because someone else will pay the cost if things go wrong. Like Lacker, Philadelphia’s Charles Plosser and a few other Fed officials saw the Bear Stearns rescue as the original sin that led to the risk taking that worsened the turmoil that would follow later: the Fed, they argued, had led markets, executives, and creditors of big financial institutions to take unwise risks with the understanding that they expected the Fed to step in if anything bad happened.

Meltzer, “Keep the Fed Away from Investment Bank,” Wall Street Journal, July 16, 2008, A17. 157 The SEC was legally: Kara Scannell and Susanne Craig, “SEC Chief under Fire as Fed Seeks Bigger Wall Street Role — Cox Draws Criticism for Low-Key Leadership during Bear Crisis,” Wall Street Journal, June 23, 2008, A1. 158 “We’ve got to make” Greg Ip, “Crisis Management: Fed’s Fireman on Wall Street Feels Some Heat,” Wall Street Journal, May 30, 2008, A1. 158 “Things happened very quickly” Senate Banking Committee, hearing, April 3, 2008. 159 “Everybody on the phone” Interview, Donald Kohn. 159 Bear Stearns had: Harvey Rosenbloom, et al., “Fed Interview: Managing Moral Hazard in Financial Crisis,” Economic Letter, Federal Reserve Bank of Dallas, October 2008. 160 “a gigantic centralization” Herbert Hoover, “Herbert Hoover: 1932-33,” from the Public Papers of the Presidents of the United States Web site, 1932, 308. http://quod.lib.umich.edu/cgi/t/text/pageviewer-idx?


pages: 701 words: 199,010

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

affirmative action, Alan Greenspan, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black-Scholes formula, Bob Litterman, business cycle, 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, currency risk, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, Glass-Steagall Act, global macro, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, Kickstarter, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, low skilled workers, managed futures, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, Mitch Kapor, money market fund, moral hazard, mortgage debt, Myron Scholes, National best bid and offer, negative equity, Northern Rock, Occupy movement, oil shock, price stability, proprietary trading, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, tail risk, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

Some of the suggestions for reform may lead to a worse situation whereby participants will begin withdrawing early from an institution as they try to get out before the government jumps in and makes mistakes. —Myron Scholes interview, Nobel prizewinner in economics, July 9, 2011 Many people criticized bailouts for creating moral hazard, but it isn’t clear that this was a problem. Many bank equity holders lost almost everything in the bailouts. In all cases, the government bailed out bond holders, who don’t really manage an institution.16 Shareholders and managers run firms. The market needs rules that reduce moral hazard as much as possible before a lender of last resort gets involved. This is no easy task. I presume the Fed understood the importance of the coordination for LTCM in 1998.

For this reason, separating big banks into smaller pieces by line of business might be a good idea. Individual agents may treat big firms differently. In a deal with a very large firm, a trader might think that the government has issued an implicit rescue guarantee and therefore the situation is less risky. Moral hazard, an economic term used to describe a situation in which a participant insulated from risk behaves differently than a participant fully or partially exposed to risk, enters the equation. Suppose I believe that the government will bail out AIG if it is in trouble. I probably won’t monitor AIG’s risks very carefully.

If they continued to bet big on the housing market and kept earning the leveraged spread, profits would be high—and so would individual bonuses. If the housing market collapsed and the GSEs were insolvent, the government would rescue them, just as it had rescued the Farm Credit System in 1987. In economics, this is called the moral hazard problem. No one had a very strong incentive to be vigilant. In fact, the GSEs became slightly more enamored of risk. Between 2004 and 2006, there was a large rise in the subprime mortgage market. Wall Street firms were securitizing these loans, reducing Freddie and Fannie’s share of the total mortgage market between 2003 and 2006 (see Table 10.1).


pages: 524 words: 143,993

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

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

The solution to the Eurozone crisis from the German perspective, then, is to impose these principles throughout the Eurozone. That explains the emphasis on rule-making. It also explains the emphasis on austerity and structural reform. In the German view, this is a long game. Germany believes in tough love. This is also partly because it has been consistently fearful of ‘moral hazard’ in international lending. The idea of ‘moral hazard’ is that providing generous and, above all, unconditional insurance against mishap encourages unduly risky behaviour. These concerns about incentives provided by insurance are legitimate: it is why insurance contracts include deductibles payable by the insured. In the end, Germany has shown itself willing to provide conditional and limited support, but only if vulnerable member states are prepared to toe their line: those then are the conditions that accompany the insurance.

Crisis Intervention The final question concerns how the policymakers responded to the crisis when it hit. In the panic, they were caught between two opposing pressures: the first was the view that those who made mistakes should be allowed to fail, to minimize ‘moral hazard’ (the risk that insurance makes the insured take greater risks); the second was the need to respond to a panic. The concern about moral hazard is greatly exaggerated. Nobody argues there should be no fire service because the knowledge that it exists encourages people to take the risk of smoking in bed. We have fire brigades mainly because of the spillover impact on innocent people: if someone’s house burns down, we may end up with the Great Fire of London, as happened in 1666.

All these views turn out to be partially correct. The chapter will analyse what makes financial systems inherently fragile. It will then look closely at what made the financial system particularly fragile, prior to 2007. It will examine the growth of ‘shadow banking’, the increase in financial complexity and interconnectedness, the role of ‘moral hazard’, and the responsibilities of governments in handling crises. It will also argue that important mistakes were made in understanding the limitations of inflation targeting in managing economies. Yet – Chapter Five will add – the vulnerability to crisis was not due to what happened inside the financial system alone.


pages: 105 words: 25,871

A Nation of Takers: America’s Entitlement Epidemic by Nicholas Eberstadt, Nick Eberstadt

Affordable Care Act / Obamacare, corporate governance, family office, income inequality, informal economy, Kenneth Rogoff, labor-force participation, military-industrial complex, moral hazard, reserve currency, women in the workforce, working-age population

When society commits itself to the principle that a serious and sustained effort to provide for oneself and one’s family should be rewarded, independence becomes more rather than less likely. There is no necessary relation between the growth of means-tested government benefits and the increase in the kind of dependence we care about from a moral point of view. There is a moral hazard, however. At some point the desire to ease the plight of the poor who are doing the best they can shades over into assistance for the not-so-poor whose lives would be harder but not unworkable without it. In the past five years, for example, the number of individuals participating in the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps) has exploded from 26 million to 46 million, and annual costs have risen from $33 billion to more than $75 billion.

But neither Social Security nor Medicare is actuarially sound today—in fact, they never have been actuarially sound. They can only survive over the long term by taking resources from outsiders who have not participated in their programs. This is not reciprocity—nor is the gaming of the Disability Insurance trust fund (a moral hazard Galston highlights), nor the increasing predilection by ever less impoverished Americans to apply for “means-tested” benefits. To the contrary—all of this smacks of the something-for-nothing mentality that I see as all to integral to the rise of our modern entitlement state. I will be delighted if William Galston and likeminded citizens can restore more reciprocity to our public social programs: but I suspect this will not be possible without a decidedly smaller welfare state, with less influence in everyday American life, or without decidedly more self-reliance for Americans of every walk of life.


pages: 375 words: 88,306

The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism by Arun Sundararajan

"World Economic Forum" Davos, additive manufacturing, Airbnb, AltaVista, Amazon Mechanical Turk, asset light, autonomous vehicles, barriers to entry, basic income, benefit corporation, bike sharing, bitcoin, blockchain, book value, Burning Man, call centre, Carl Icahn, collaborative consumption, collaborative economy, collective bargaining, commoditize, commons-based peer production, corporate social responsibility, cryptocurrency, data science, David Graeber, distributed ledger, driverless car, Eben Moglen, employer provided health coverage, Erik Brynjolfsson, Ethereum, ethereum blockchain, Frank Levy and Richard Murnane: The New Division of Labor, future of work, general purpose technology, George Akerlof, gig economy, housing crisis, Howard Rheingold, independent contractor, information asymmetry, Internet of things, inventory management, invisible hand, job automation, job-hopping, John Zimmer (Lyft cofounder), Kickstarter, knowledge worker, Kula ring, Lyft, Marc Andreessen, Mary Meeker, megacity, minimum wage unemployment, moral hazard, moral panic, Network effects, new economy, Oculus Rift, off-the-grid, pattern recognition, peer-to-peer, peer-to-peer lending, peer-to-peer model, peer-to-peer rental, profit motive, public intellectual, purchasing power parity, race to the bottom, recommendation engine, regulatory arbitrage, rent control, Richard Florida, ride hailing / ride sharing, Robert Gordon, Ronald Coase, Ross Ulbricht, Second Machine Age, self-driving car, sharing economy, Silicon Valley, smart contracts, Snapchat, social software, supply-chain management, TaskRabbit, TED Talk, the long tail, The Nature of the Firm, total factor productivity, transaction costs, transportation-network company, two-sided market, Uber and Lyft, Uber for X, uber lyft, universal basic income, Vitalik Buterin, WeWork, Yochai Benkler, Zipcar

This effect of peer-to-peer rental is exacerbated by what economists call “moral hazard.” While it may be a stereotype, there’s some truth to the fact that renters don’t always care for property as well as its owners do. Think about how you treat a rental car relative to how you treat your own car. You don’t have a long-term commitment. Further, you are acquainted with your own assets whereas renters may not be, which might cause additional wear and tear from unfamiliarity. Thus, despite a variety of technological advances for monitoring and the emergence of sophisticated online reputation systems, moral hazard cannot be fully mitigated. As a consequence, peer-to-peer rental markets will affect the expected lifetime of an asset and increase transaction costs incurred during resale, both from increased usage and potentially less careful use.

This lowers the average quality in the market, further lowering the willingness of customers to pay, inducing further unwillingness to transact, and so on, until only the lowest quality providers are left, and the market either unravels, or remains, like Craigslist, on the fringes of the economy. Furthermore, information asymmetry can also lead to “moral hazard”—because parties’ imperfect information limits their ability to contract, one trading partner might display behavior that is less careful (e.g., reckless driving), of lower effort (e.g., lower levels of cleanliness), or somehow riskier than the partner otherwise would have chosen. Prior to the emergence of Internet-enabled marketplaces, the only way to make peer-to-peer economic exchange safe was to embed the exchange into a trusting local community (a village, a family, a suburban neighborhood), or to look to the government or some other third-party certifying body to address these forms of information asymmetry.

See also Car sharing blurring of boundaries and, 141, 142 capital impact of, 115–116 consumer behavior changed by, 110 data science and, 157 driver classification, 183 growth of, 9–11 human connectedness and, 44, 45 impact on traditional taxis, 122–123 LyftLine service, 66 as microentrepreneurship, 125 new social safety net and, 191 platform independence, 194 pricing, supply, and merchandizing, 194, 195 regulatory challenges, 135 social capital and, 62, 64 trust and, 145 MacArthur Foundation, 183 Maghribi traders, 142–144 Malik, Om, 201 Malone, Tom, 69, 72–74 ManagedByQ, 160 Managerial capitalism, 69–70 Mancini, Pia, 23 Mandated transparency, 157 Mantena, Ravi, 57 Manufacturing, additive, 57–58 Markets and hierarchies, 70–72 hybrid, 77–84 peer-to-peer rental market analysis, 125 Martín, Borja, 65 Mashable, 3 Mauss, Marcel, 35 Mazzella, Frédéric, 12–13, 47, 204 McAfee, Andrew, 165–166 McKinsey and Company, 165, 187 Measures of National Well-being, 111 “Medium granularity” goods, 31–32 Meece, Brian, 41 Meeker, Mary, 1 Meetup, 45–46 Mehta, Apoorva, 187 Melding of commerce and community, 13–16 Mendoza, Lenny, 187 Mesh, 28–29, 79–82 Mesh, The (Gansky), 28, 79 Microbusiness, 77, 106–107, 108, 192 Microentrepreneurship, 125 Micro-outsourcing, 77 Microsoft, 54 Miller, Michelle, 161, 187 Minibar, 12 “Mock Trial of the Collaborative Economy, The” (Fillipova), 26 Mohlmann, Mareike, 204 Moore, Gordon, 53 Moore’s law, 53 Mootoosamy, Edwin, 23 Moral hazard, 127–128, 139–140 Mosaic, 59 Mt.Gox, 100–101 Munchery, 12, 45 Murnane, Richard, 165 Murphy, Padden, 136 MySimon, 97 Napster, 58–59, 92, 114–115 NASDAQ, 100 National Association of Realtors, 153 National Domestic Workers Alliance, 192 National Labor Relations Board (NLRB), 179, 183, 184, 186 National League of Cities, 131 Nationwide Mutual Insurance v.


pages: 538 words: 121,670

Republic, Lost: How Money Corrupts Congress--And a Plan to Stop It by Lawrence Lessig

air traffic controllers' union, Alan Greenspan, asset-backed security, banking crisis, carbon tax, carried interest, circulation of elites, cognitive dissonance, corporate personhood, correlation does not imply causation, crony capitalism, David Brooks, Edward Glaeser, Filter Bubble, financial deregulation, financial innovation, financial intermediation, Glass-Steagall Act, Greenspan put, invisible hand, jimmy wales, low interest rates, Martin Wolf, meta-analysis, Mikhail Gorbachev, moral hazard, Pareto efficiency, place-making, profit maximization, public intellectual, Ralph Nader, regulatory arbitrage, rent-seeking, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Silicon Valley, single-payer health, The Wealth of Nations by Adam Smith, too big to fail, TSMC, Tyler Cowen, upwardly mobile, WikiLeaks, Yochai Benkler, Zipcar

From this perspective, the fundamental flaw in the system is one that conservatives often harp upon in the context of welfare: the system created a “moral hazard problem.” With welfare, the conservative’s concern is that unemployment payments (intended to cushion the burden of losing a job) may encourage people not to seek a job. With the financial system, the conservative’s concern should be that the promise of a government bailout will encourage the banks to behave more recklessly. Indeed, the evidence of this moral hazard is quite compelling. Banks in the United States have gotten huge in the past ten years. They’ve gotten only bigger after the most recent crisis.36 Before the crisis, each bank could reasonably hope that if it got into trouble, the government would help it.

And we should say, following Zingales, “[I]f you have a sector… where losses are socialized but where gains are privatized, then you destroy the economic and moral supremacy of capitalism.”42 Banks are rational actors. They would not expose our economy to fundamental systemic risk if it didn’t pay—them. And it wouldn’t pay them if they believed that they would go bankrupt when their gambles blew up. So the single most important reform here should have been to end this “moral hazard problem” for banks. And the one simple way to do that would have been to guarantee that banks wouldn’t be bailed out in the future. The reform bill that passed Congress in 2010 tried to make that guarantee. But that guarantee is not worth the PDF it is embedded within. If any of the six largest banks in the United States today faced bankruptcy, the cost that bankruptcy would impose on America would clearly justify the government’s intervening to save it.

David Moss, “Reversing the Null: Regulation, Deregulation, and the Power of Ideas,” Harvard Business School Working Paper, No. 10-080, Oct. 2010, 3, available at link #75. This graph was derived from Moss’s more extensive original with permission from the author. 3. David Moss, “An Ounce of Prevention: Financial Regulation, Moral Hazard, and the End of ‘Too Big to Fail,’ ” Harvard Magazine (Sept.–Oct. 2009): 25. 4. See Richard A. Posner, The Crisis of Capitalist Democracy (Cambridge, Mass.: Harvard University Press, 2010); and Richard A. Posner, A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression (Cambridge, Mass.: Harvard University Press, 2009). 5.


The Economics Anti-Textbook: A Critical Thinker's Guide to Microeconomics by Rod Hill, Anthony Myatt

American ideology, Andrei Shleifer, Asian financial crisis, bank run, barriers to entry, behavioural economics, Bernie Madoff, biodiversity loss, business cycle, cognitive dissonance, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, different worldview, electricity market, endogenous growth, equal pay for equal work, Eugene Fama: efficient market hypothesis, experimental economics, failed state, financial innovation, full employment, gender pay gap, Gini coefficient, Glass-Steagall Act, Gunnar Myrdal, happiness index / gross national happiness, Home mortgage interest deduction, Howard Zinn, income inequality, indoor plumbing, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, liberal capitalism, low interest rates, low skilled workers, market bubble, market clearing, market fundamentalism, Martin Wolf, medical malpractice, military-industrial complex, minimum wage unemployment, moral hazard, Paradox of Choice, Pareto efficiency, Paul Samuelson, Peter Singer: altruism, positional goods, prediction markets, price discrimination, price elasticity of demand, principal–agent problem, profit maximization, profit motive, publication bias, purchasing power parity, race to the bottom, Ralph Nader, random walk, rent control, rent-seeking, Richard Thaler, Ronald Reagan, search costs, shareholder value, sugar pill, The Myth of the Rational Market, the payments system, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, ultimatum game, union organizing, working-age population, World Values Survey, Yogi Berra

(We will have more to say about credit markets, and how asymmetric information and limited rationality played major roles in the global financial meltdown of 2008/09, in the Postscript.) Asymmetric information gives rise to a cluster of well-known problems. First, it allows some people to benefit at the expense of those they are supposed to serve – the so-called ‘principal agent’ problem. Second, it contributes to ‘moral hazard’, where incentives are changed by certain kinds of contracts. (For example, individuals may have less incentive to prevent fires after buying fire insurance, and asymmetric information means that we can’t easily monitor this changed behaviour.) Third, it contributes to ‘adverse selection’, where particular contracts disproportionately attract undesirable customers.

Akerlof and Shiller say (2009: 173): 244 While endorsing the importance of animal spirits and limited rationality, we do not agree with Akerlof and Shiller that if individuals were rational and had only economic motives then there would be little role for the government in regulating financial markets. Problems of imperfect and asymmetric information are pervasive and are particularly important in financial markets. They give rise to principal-agent problems, moral hazard problems and adverse selection. This suggests a key role for the government in regulating many markets, in­ cluding financial markets. The goals of equity and efficiency Textbooks emphasize the importance of efficiency and downplay the importance of equity. In textbook treatments, the equity goal is always subservient to the efficiency goal.

Nor can depositors and shareholders know everything about the solvency and risk profile of any given bank; nor (it turns out) can borrowers know everything about how honestly the terms, conditions and fees associated with loans may be presented. We noted in Chapter 6 that asymmetric information gives rise to a cluster of well-known problems: the principal-agent problem, the moral hazard problem and the adverse selection problem. Competitive markets cannot function effi­ ciently when these problems are present: government regulation is required. So, how do these problems manifest themselves in credit markets? 256 The role of externalities The temptation of high returns might lull a bank into ignoring the increasing riskiness of loans as interest rates rise.


pages: 88 words: 26,706

Against the Web: A Cosmopolitan Answer to the New Right by Michael Brooks

4chan, Anton Chekhov, Ayatollah Khomeini, basic income, Bernie Sanders, capitalist realism, centre right, Community Supported Agriculture, crony capitalism, deindustrialization, Donald Trump, drone strike, Flynn Effect, gun show loophole, invisible hand, Jeremy Corbyn, late capitalism, market fundamentalism, mass incarceration, moral hazard, Nelson Mandela, open borders, Peter Thiel, Philippa Foot, public intellectual, Silicon Valley, Slavoj Žižek, The Bell Curve by Richard Herrnstein and Charles Murray, trolley problem, universal basic income, upwardly mobile

Private insurance poses serious moral hazards and may in the long run undermine public health, despite the possible gains from private sector innovation. The danger of private insurance is such that—and this is horrible to contemplate—we may need to consider a government solution to healthcare. Now in some major respects this is unthinkable—however, it’s something that we need to examine no matter how upsetting. Would framing my support for Medicare for All in this way make it somehow better than a straightforward argument that emerged from clearly stated premises about moral hazards and public outcomes?


pages: 840 words: 202,245

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

Abraham Maslow, accounting loophole / creative accounting, Alan Greenspan, AOL-Time Warner, Asian financial crisis, bank run, Bear Stearns, book value, Bretton Woods, business cycle, capital controls, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Glass-Steagall Act, Greenspan put, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, John Bogle, John Meriwether, junk bonds, Kitchen Debate, laissez-faire capitalism, locking in a profit, Long Term Capital Management, low interest rates, market bubble, Mary Meeker, Michael Milken, minimum wage unemployment, MITM: man-in-the-middle, Money creation, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, North Sea oil, Northern Rock, oil shock, Paul Samuelson, Philip Mirowski, Phillips curve, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Bork, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, scientific management, shareholder value, short selling, Silicon Valley, Simon Kuznets, tail risk, Tax Reform Act of 1986, 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

Few accepted the claim that Washington could not have taken over the firm if it had wanted to. Bernanke, Geithner, and Paulson were becoming confident in August that the markets might be able to withstand a Lehman bankruptcy, and Paulson particularly feared creating moral hazard—overconfidence that the government would always bail out firms in trouble, thereby encouraging them to take risks. There was rising public anger about bailouts and conservative anger about the creation of moral hazard. In letting Lehman fail, however, the Fed and Treasury were largely flying blind. They presumed that the securitized mortgage products had been distributed among investors around the world—and therefore losses would be dispersed and readily manageable.

One in four Americans looking for a full-time job would not have been able to find one. Average wages may have fallen sharply for those with a job. Some economists argued that because bankers knew the federal government would bail them out, they took undue risks that led to speculative excess—such moral hazard, these economists argue, meant that the crisis was government’s fault. But this argument is exaggerated, implying that speculative bubbles are more rational than they are. Damaging financial crises occurred throughout nineteenth-century and early-twentieth-century America when no government entity could genuinely be counted on to bail out big lenders.

In fact, investment in Mexico not only failed to revive, but fell and stayed low in Mexico and other developing countries at the time. There are many other examples of nations that got government bailouts without a revival in investment. The nature of herd behavior is to cast common sense aside, whether a lender of last resort exists or not. Moral hazard is among the causes of overspeculation but not likely the determining part. Herd behavior is hardly rational. And the extent of federal activity in 2008 and 2009 was far greater than ever before. No one on Wall Street could have anticipated such aggressive responses. The larger concern by far is what would have happened had government not taken the actions it did.


pages: 543 words: 157,991

All the Devils Are Here by Bethany McLean

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, Bear Stearns, behavioural economics, Black-Scholes formula, Blythe Masters, break the buck, buy and hold, call centre, Carl Icahn, collateralized debt obligation, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, Dr. Strangelove, Exxon Valdez, fear of failure, financial innovation, fixed income, Glass-Steagall Act, high net worth, Home mortgage interest deduction, interest rate swap, junk bonds, Ken Thompson, laissez-faire capitalism, Long Term Capital Management, low interest rates, margin call, market bubble, market fundamentalism, Maui Hawaii, Michael Milken, money market fund, moral hazard, mortgage debt, Northern Rock, Own Your Own Home, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, race to the bottom, risk/return, Ronald Reagan, Rosa Parks, Savings and loan crisis, shareholder value, short selling, South Sea Bubble, statistical model, stock buybacks, tail risk, Tax Reform Act of 1986, telemarketer, the long tail, too big to fail, value at risk, zero-sum game

And, like Greenspan, Summers’s belief that the market cured all problems blinded him to the systemic risks that were building up. But he could see all too clearly the risks posed by Fannie and Freddie. For officials like Greenspan and Summers, there was something offensive about the GSEs. The moral hazard that existed in the banking system—and that would be all too obvious during the financial crisis—was something policy makers couldn’t see. But the moral hazard posed by Fannie and Freddie? That they could see plain as day. In late 1999, Summers made a speech at a Women in Housing & Finance conference, which included one sentence about Fannie and Freddie: “Debates about systemic risk should also now include government-sponsored enterprises, which are large and growing rapidly.”

Fannie and Freddie weren’t going away; they were a problem that needed to be managed. Besides, the GSEs were only partly to blame for the monsters they’d become. “This was created by Congress,” he’d say. When he did focus on Fannie and Freddie, he didn’t gnash his teeth at the moral hazard they posed. Rather, he worked to reduce that moral hazard. One step was to get Fannie and Freddie a new regulator. It was no secret that OFHEO was outmatched; practically from the moment he was named Treasury secretary, Paulson had worked to push through legislation to create a new regulator that would have real authority to set capital requirements, conduct serious audits, and even—if it came to that—wind down the GSEs.

Morgan would not have done the deal if the Fed hadn’t agreed to provide a $30 billion loan to a stand-alone entity that would buy a pool of Bear’s mortgages that J.P. Morgan didn’t want. The banks’ dirty little secret was now out in the open. It wasn’t just Fannie and Freddie that had been creating moral hazard all these years. So had the nation’s big banks. They had taken on terrible risks, built up immense leverage, and created such tight interconnections with their derivatives books that the failure of any one of them could bring down all the others. When things got bad, they assumed they had an “implicit government guarantee,” just like Fannie and Freddie.


pages: 419 words: 130,627

Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase by Duff McDonald

"World Economic Forum" Davos, Alan Greenspan, AOL-Time Warner, bank run, Bear Stearns, Blythe Masters, Bonfire of the Vanities, book value, business logic, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Exxon Valdez, financial innovation, fixed income, G4S, Glass-Steagall Act, Greenspan put, housing crisis, interest rate swap, Jeff Bezos, John Meriwether, junk bonds, Kickstarter, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, Michael Milken, money market fund, moral hazard, negative equity, Nelson Mandela, Northern Rock, profit motive, proprietary trading, Renaissance Technologies, risk/return, Rod Stewart played at Stephen Schwarzman birthday party, Saturday Night Live, sovereign wealth fund, statistical model, Steve Ballmer, Steve Jobs, technology bubble, The Chicago School, too big to fail, Vanguard fund, zero-coupon bond, zero-sum game

Dimon replied that he’d been thinking of the shareholders’ vote that would be required at Bear Stearns, and that to go much lower would be to risk enraging the very people he needed to approve a transaction. “But at the end of the day, it wasn’t that big a deal, so we changed it to $2,” he recalls. On the subject of moral hazard, however, he took a slightly softer line than Paulson. “I don’t quite get the whole moral hazard argument, the whole ‘We’ll show them!’ mentality,” he said. “So a drunk friend of yours falls in a river. Do you let them drown? No, you save them. And after you save them, you deal with their problem. No, I don’t think highly paid executives at any investment bank deserve to get bailed out.

The Federal Reserve was second-guessed for intervening in the capital markets, but it did stick to its historical prohibition against lending to nonbanking institutions. The Fed didn’t bail out LTCM; the rest of Wall Street did. But it nevertheless crossed a line that had lingering ramifications a decade later, when Wall Street once again teetered on the edge. Orchestrating the bailout of LTCM was the original sin when it came to so-called moral hazard. The government had stepped in to facilitate the rescue of a bunch of capitalists gone mad. The next time that happened, Jamie Dimon would play a central role. In retrospect, one can argue that by shutting Salomon’s fixed income arbitrage desk, Weill and Dimon shot themselves in the foot; the unit’s liquidation made it nearly impossible for LTCM to find buyers for many of the same positions in that summer’s turbulent markets.

“That sounds high to me. I think this should be done at a very low price,” Paulson replied. “Why $4? Why not $1? The less you offer, the less it’s going to look like a bailout.” Paulson didn’t want to anger the American people by seeming to rescue greedy bankers from their own mistakes. He also raised the issue of “moral hazard”—the idea that bailing out equity holders of Bear Stearns would encourage future reckless behavior. “Where there is intervention, I really believe that the shareholders need to lose,” Paulson later told Fortune magazine. “Bear Stearns was a great old institution, but I don’t know how you can put government money in there and protect the shareholders.”


pages: 484 words: 136,735

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

"World Economic Forum" Davos, Alan Greenspan, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Black Swan, bond market vigilante , bonus culture, Bretton Woods, BRICs, business cycle, buy and hold, Carmen Reinhart, classic study, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, eat what you kill, Edward Glaeser, electricity market, 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, foreign exchange controls, full employment, geopolitical risk, George Akerlof, global rebalancing, Goodhart's law, Great Leap Forward, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, long and variable lags, Long Term Capital Management, low interest rates, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, military-industrial complex, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Nelson Mandela, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, Paul Volcker talking about ATMs, 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 Solow, Ronald Reagan, Savings and loan crisis, seminal paper, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, systems thinking, 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

Many regulators, especially central bankers, still believe that making bank guarantees explicit will create moral hazard. They also claim that governments keep investors on their toes with constructive ambiguity about which bank liabilities might enjoy taxpayer support. These views have been discredited by the financial crisis. When governments left any doubt about which bank liabilities were protected, they usually ended up offering guarantees to all creditors, no matter how junior, in all banks, no matter how small. Constructive ambiguity, far from saving taxpayer money, has turned out to be the greatest source of moral hazard. This experience also refutes suggestions that moral hazard can be overcome by breaking up banks that are too big to fail.

Every few decades, any capitalist financial system, even a well-regulated and managed one, is likely to suffer a potentially fatal heart attack. To minimize the economic dangers of such emergencies, the government must provide a public safety net for the financial system, just as it provides defibrillators in public places. Caballero points out that the government’s provision of emergency equipment may marginally increase the “moral hazard” of people eating too many hamburgers, but no one would suggest that the right response to heart attacks is simply to blame the victims and let them die. The same reasoning applies to public mechanisms for rescuing banks.41 Henry Paulson’s inability to understand that safeguarding the financial system is a core responsibility of government had deep ideological roots.

Andrews, “Greenspan Concedes Error on Regulation,” New York Times, October 23, 2008. 2 Ayn Rand, “Introducing Objectivism” (August 1962), in The Objectivist Newsletter: 1962-1965, 35. 3 This point is made brilliantly by the British economist, John Kay, in his analysis of the interdependence of economics and politics in all capitalist societies, Culture and Prosperity: The Truth About Markets—Why Some Nations Are Rich but Most Remain Poor. 4 See most recently Angus Maddison’s Growth and Interaction in the World Economy: The Roots of Modernity and Mancur Olson’s Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities. 5 Ricardo Caballero of MIT, in what was probably the most penetrating analysis of the financial crisis by an academic economist, made the specific comparison between credit guarantees and the placement of defibrillators in public places: “The moral hazard perspective is the equivalent of discouraging the placement of defibrillators in public places because of the concern that, upon seeing them, people would have a sudden urge to consume cheeseburgers since they would realize that their chances of surviving a Sudden Cardiac Arrest had risen as a result of the ready access to defibrillators . . .


pages: 515 words: 142,354

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

"there is no alternative" (TINA), "World Economic Forum" Davos, Alan Greenspan, bank run, banking crisis, barriers to entry, battle of ideas, behavioural economics, Berlin Wall, Bretton Woods, business cycle, buy and hold, capital controls, carbon tax, 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, Great Leap Forward, 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, light touch regulation, low interest rates, 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 Shiller, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

But if one imposes stifling conditions and charges high interest rates, then the economy will stagnate, and the debt-to-GDP ratio will increase. Some in Germany (and elsewhere) claim high interest rates were necessary to discourage moral hazard, the risk that governments would spend recklessly and then turn to Europe for assistance. But no government would willingly put itself through the torture that Greece has endured. Moreover, whatever mistakes in lending occurred earlier—punishing Greece today doesn’t rectify yesterday’s mistakes. The real moral hazard problem arises for banks, who have an incentive to induce countries to borrow excessively, knowing that current politicians benefit from the increased spending and future politicians pay the price.

If instead of just bailing out failing banks, the governments took shares in those banks, then the country’s fiscal position would be that much stronger when the banks rebounded, and perhaps the banks would be more prudent in their lending.45 True to history, Germany and the Troika did little to address the banks’ moral hazard in the case of Greece and some of the other European bailouts. Indeed, as we saw in the case of Ireland, the ECB demanded (secretly) that Ireland bail out its banks. Whatever the reason, Germany’s demand for high interest rates was well in excess of those at which Germany could borrow. This dealt a blow to any notion of European solidarity: What does solidarity mean if one country is able and willing to make a profit off its neighbor in its time of need?

Glenn Hubbard (Chicago: University of Chicago Press, 1991), pp. 33–68; Peter Temin, Lessons from the Great Depression (Cambridge, MA: MIT Press, 1989); Barry Eichengreen and Jeffrey Sachs, “Exchange Rates and Economic Recovery in the 1930s,” Journal of Economic History 45, no. 4 (1985): 925–46. 19 Even from a social point of view, some government restrictions on firing (requiring severance pay) may be desirable. See Carl Shapiro and Joseph E. Stiglitz, “Equilibrium Unemployment as a Worker Discipline Device,” American Economic Review 74, no. 3 (1984): 433–44; and Patrick Rey and Joseph E. Stiglitz, “Moral Hazard and Unemployment in Competitive Equilibrium,” 1993 working paper. 20 These theories arguing that lowering wages lowers workers’ productivity were first developed in the context of developing countries, where it was observed that low nutrition resulting from low wages hurt productivity. See Harvey Leibenstein, Economic Backwardness and Economic Growth (New York: Wiley, 1957).


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

Alan Greenspan, Andrei Shleifer, banking crisis, Bear Stearns, Bernie Madoff, business cycle, collateralized debt obligation, collective bargaining, compensation consultant, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Glass-Steagall Act, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, low interest rates, market bubble, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, oil shock, Ponzi scheme, price stability, profit maximization, proprietary trading, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, savings glut, shareholder value, short selling, statistical model, subprime mortgage crisis, too big to fail, transaction costs, very high income

But the mistakes were systemic —the product of the nature of the banking business in an environment shaped by low interest rates and deregulation rather than the antics of crooks and fools. Laissez-faire capitalism failed us, but government allowed the preconditions of depression to develop and wreak havoc with the economy. And its responses to the crisis were late, slow, indecisive, and poorly articulated. The responses also created "moral hazard" (the tendency to engage in risky behavior if one is insured against the consequences of the risks' materializing). They did this by eliminating the limits on federal deposit insurance of bank deposits and by extending that insurance to checkable accounts in money market funds, but more important by bailing out failing firms deemed "too big to fail"—an incentive for corporate giantism and financial irresponsibility (which go hand in hand because the difficulty of controlling subordinates grows with the size of an organization).

The government gratuitously disrupted the operations of hedge funds by limiting short selling—at the height of the banking crisis the Securities and Exchange Commission forbade short selling of financial stocks. And by substantially increasing the federal deficit, the government's responses to the crisis are sowing the seeds of a future inflation. But of these criticisms, the main ones — the creation of moral hazard and the planting of the seeds of a future inflation—concern the unavoidable side effects of any effective measures to limit a depression. To blame the government for the depression is questionable in two respects. First, were there no government regulation of the economy, there probably would still have been a depression, because even without the Federal Reserve's loose monetary policy in the early 2000s there would have been enough capital from abroad to keep interest rates low unless the Fed had been more alert than it was to the risk of depression that low interest rates create.

Although bailouts do not save all firms, all careers, or all shareholder values, firms that are saved by a bailout retain employees who would have lost their jobs had the firm not been saved, and equity values are preserved that would disappear in bankruptcy. Still, a bailout is a traumatic experience. Even holders of secure debt are often badly hurt, because the value of their collateral falls. But overriding moral-hazard concerns is the fact that depressions would be significantly deeper and last significantly longer were government unwilling to take aggressive steps to counter them with monetary and fiscal measures. Second, in financial regulation the line between government and the private sector is blurred.


pages: 468 words: 145,998

On the Brink: Inside the Race to Stop the Collapse of the Global Financial System by Henry M. Paulson

Alan Greenspan, asset-backed security, bank run, banking crisis, Bear Stearns, break the buck, Bretton Woods, buy and hold, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Doha Development Round, fear of failure, financial engineering, financial innovation, fixed income, housing crisis, income inequality, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, money market fund, moral hazard, Northern Rock, price discovery process, price mechanism, regulatory arbitrage, Ronald Reagan, Saturday Night Live, Savings and loan crisis, short selling, sovereign wealth fund, technology bubble, too big to fail, trade liberalization, young professional

., making a mental note not to say a word about the negotiations and to stick to my carefully prepared talking points. I taped ABC’s This Week first. The host, George Stephanopoulos, zeroed in on what was on the public’s mind, asking whether we weren’t using taxpayer dollars to bail out Wall Street. “We’re very aware of moral hazard,” I said, adding, “My primary concern is the stability of our financial system.” “Are there other banks in a situation similar to Bear Stearns’s right now?” he wanted to know. “Is this just the beginning?” “Well, our financial institutions, our banks and investment banks, are very strong,” I stressed.

I could now see there was no way they would do that. They were understandably shocked by Bear. And of course, the deal was hugely controversial in the U.S. Although plenty of commentators thought it was a brilliant, bold stroke that saved the system, there were just as many who thought it outrageous, a clear case of moral hazard come home to roost. They thought we should have let Bear fail. Among the prominent members of this camp was Senator Richard Shelby, who said the action set a “bad precedent.” To be fair, I could see my critics’ arguments. In principle, I was no more inclined than they were to put taxpayer money at risk to rescue a bank that had gotten itself in a jam.

After a short statement, I took questions from four dozen or so journalists packed into the small, windowless room. They were all on edge. In my answers, I attempted to put the crisis in perspective, noting its roots in the housing price collapse and pointing out that a more satisfying solution had been hindered by our archaic financial regulatory structure. “Moral hazard,” I made clear, “is something I don’t take lightly.” But I drew a distinction between our actions in March with Bear Stearns and now with Lehman Brothers. I stressed that unlike with Bear, there had been no buyer for Lehman. For that reason, I said: “I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers.”


pages: 488 words: 144,145

Inflated: How Money and Debt Built the American Dream by R. Christopher Whalen

Alan Greenspan, Albert Einstein, bank run, banking crisis, Bear Stearns, Black Swan, book value, Bretton Woods, British Empire, business cycle, buy and hold, California gold rush, Carl Icahn, Carmen Reinhart, central bank independence, classic study, commoditize, conceptual framework, Cornelius Vanderbilt, corporate governance, corporate raider, creative destruction, cuban missile crisis, currency peg, debt deflation, falling living standards, fiat currency, financial deregulation, financial innovation, financial intermediation, floating exchange rates, Ford Model T, Fractional reserve banking, full employment, Glass-Steagall Act, global reserve currency, housing crisis, interchangeable parts, invention of radio, Kenneth Rogoff, laissez-faire capitalism, land bank, liquidity trap, low interest rates, means of production, military-industrial complex, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, mutually assured destruction, Nixon triggered the end of the Bretton Woods system, non-tariff barriers, oil shock, Paul Samuelson, payday loans, plutocrats, price stability, pushing on a string, quantitative easing, rent-seeking, reserve currency, Ronald Reagan, Savings and loan crisis, special drawing rights, Suez canal 1869, Suez crisis 1956, The Chicago School, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, Upton Sinclair, women in the workforce

Indeed, the temptation to use a moderate and unexpected inflation tax to wipe out the real value of public debt and avoid the debt deflation of the private sector is powerful, and history may repeat itself—even if the short-term maturity of U.S. liabilities, the risk of a crash of the U.S. dollar and associated runaway rising inflation, and the related risk that the United States’ foreign creditors may pull the plug on the financing of the U.S. deficit may constrain these inflationary biases. Similarly, Chris stresses the role of poor fiscal and monetary policies and botched regulatory policies in triggering recent and not so recent financial crises. But financial crises existed well before there was a central bank causing moral hazard distortions through its lender of last resort role, before misguided regulation and supervision of banks, and well before there was a significant role of federal fiscal policy in the United States. Indeed, my recent book, Crisis Economics: A Crash Course in the Future of Finance (The Penguin Press HC, 2010) shows that financial crises and economic crises driven by irrational exuberance of the financial system and the private sector—unrelated to public policies—existed for centuries before fiscal deviant sovereign and central banks distorted private-sector incentives.

Markets do fail, and they do fail regularly in irrationally exuberant market economies; that is the source of the role of central banks and governments in preventing self-fulfilling and destructive bank runs and collapses of economic activity via Keynesian fiscal stimulus in response to collapse in private demand. The fact that these monetary policies and fiscal policies may eventually become misguided—creating moral hazard and creating large fiscal deficits and debt—does not deny the fact that private market failures—independent of misguided policies—triggered asset and credit bubbles that triggered a public rescue response. Market solutions to market failures don’t work because in periods of panic and irrational depression markets fail given collective action problems in private sector decisions.

Paul Volcker has never been a hawk on bank regulation and especially with respect to the largest banks. His concern with the well being of the financial system essentially made the argument for bailing out particular banks. The good of the many, to borrow the old phrase, was more important than market discipline for the one failed institution, even if that meant embracing public subsidies and moral hazard writ large. In a very real sense, Paul Volcker and not Gerry Corrigan was the father of “too big to fail” with respect to the largest U.S. banks. Apart from fighting inflation, Volcker’s legacy to the Fed was to support and enhance the tendency of the central bank to bail out large banks. But the actions of both Volcker and Corrigan were driven by the growing reliance of America on inflation and debt; but they compounded the problem.


pages: 268 words: 74,724

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank by John Tamny

Airbnb, Alan Greenspan, Apollo 13, bank run, Bear Stearns, Bernie Madoff, bitcoin, Bretton Woods, business logic, buy and hold, Carl Icahn, Carmen Reinhart, corporate raider, correlation does not imply causation, cotton gin, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, Donald Trump, Downton Abbey, Fairchild Semiconductor, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, Glass-Steagall Act, Home mortgage interest deduction, Jeff Bezos, job automation, Joseph Schumpeter, junk bonds, Kenneth Rogoff, Kickstarter, Larry Ellison, liquidity trap, low interest rates, Mark Zuckerberg, market bubble, Michael Milken, Money creation, money market fund, moral hazard, mortgage tax deduction, NetJets, offshore financial centre, oil shock, peak oil, Peter Thiel, Phillips curve, price stability, profit motive, quantitative easing, race to the bottom, Ronald Reagan, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Solyndra, Steve Jobs, The Wealth of Nations by Adam Smith, too big to fail, Travis Kalanick, Uber for X, War on Poverty, yield curve

Rothbard quoted in Ron Paul, “Fractional Reserve Banking, Government, and Moral Hazard,” Financial Sense, July 9, 2012. 3. von Mises, Theory of Money and Credit, 341. 4. Adam Fergusson, When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany (New York: Public Affairs, 2010), 113. My emphasis. 5. Ibid., 87. 6. Ibid., 140. My emphasis. 7. von Mises, Theory of Money and Credit, 379. 8. Lawrence W. Reed, Excuse Me, Professor: Challenging the Myths of Progressivism (Washington, D.C.: Regnery, 2015), 154. 9. Ron Paul, “Fractional Reserve Banking, Government, and Moral Hazard,” Financial Sense, July 9, 2012. 10.

To see why, readers need only ask themselves how much due diligence they conduct on banks before depositing with them. Odds are very little. Why bother? The deposit is insured. Citibank is regularly in trouble; a former Fed official told this writer that it’s been bailed out five times in the last twenty-five years. But have its depositors ever suffered the bank’s incompetence? Obviously not. The “moral hazard” is we! In that case, an ideal world would have neither government-dictated reserve requirements nor the FDIC. Just as insurance companies insure against all manner of other calamities, so will they insure bank deposits. For banks with a reputation for sound lending practices, the cost of insuring one’s account would be rather small.


pages: 258 words: 71,880

Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street by Kate Kelly

Alan Greenspan, bank run, Bear Stearns, book value, buy and hold, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Donald Trump, eat what you kill, fixed income, housing crisis, index arbitrage, Long Term Capital Management, margin call, moral hazard, proprietary trading, quantitative hedge fund, Renaissance Technologies, risk-adjusted returns, shareholder value, technology bubble, too big to fail, traveling salesman

Just minutes in, he was getting hammered over Friday’s Fed bailout package. “Why not set an example of Bear Stearns?” anchor George Stephanopoulos asked. “The guys who have this record of dog-eat-dog, we’re brass knuckles, we’re tough. This is the perfect time to set an example. . . . You say you’re aware of moral hazard, but it does seem like you’re creating one.” “Well, every situation is different,” began Paulson. “We have to respond to the circumstances we’re facing today. And my concern is to minimize the impact on the broader economy as we work our way through this situation, and again, the stability of our financial system.

“Shareholders are going to get between $3 and $5 a share,” Geithner said. Over at J.P. Morgan, in fact, the figure $4 was strongly in play. “How could that be?” Paulson asked. For a company in such distress, that seemed far too high to him.19 He hadn’t needed the morning’s talk shows to remind him of the risk of moral hazard: giving taxpayers the impression that poorly managed companies would be bailed out by the government, at their expense. Geithner said he had tried to make that point to Dimon. Still, he thought Paulson should call the J.P. Morgan chief directly. Dimon answered Paulson’s call from a speakerphone box.

., the large depositor based in Charlotte, North Carolina. In the wee hours of the following morning, Lehman filed for bankruptcy. Regulators viewed Lehman’s failure, at least in part, as a cautionary tale for investment banks and the markets—a guard, after months of government intervention to salvage faltering companies, against moral hazard. The popular opinion was that Lehman CEO Dick Fuld and his board had had months to raise more capital or do a deal to sell their firm, and seeing the company go belly-up, turning twenty-five thousand employees onto the street, was the result of their incompetent stewardship. But the bankruptcy proved disastrous for both Lehman and its industry survivors.


pages: 264 words: 74,313

Wars, Guns, and Votes: Democracy in Dangerous Places by Paul Collier

business cycle, carbon tax, dark matter, deskilling, failed state, information security, military-industrial complex, moral hazard, Nelson Mandela, out of africa, price stability, structural adjustment programs, Suez crisis 1956, zero-sum game

Life at subsistence is risky: if you fall sick when you should be plowing, planting, or harvesting, your income will collapse. If vermin eat your food stores, you face starvation. You need catastrophe insurance. The problem with insurance is what economists coyly term moral hazard: if I’m insured, what the heck! If you could insure yourself against a decline in income, why get up in the morning? And so such insurance does not exist unless the moral hazard problem can be solved. The solution to moral hazard is not indignantly to protest that the insurer should not doubt your good faith, it is to make your behavior observable. Only if the insurer can see that you are trying your best does the insurance become feasible.


pages: 232 words: 71,965

Dead Companies Walking by Scott Fearon

Alan Greenspan, bank run, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, book value, business cycle, Carl Icahn, corporate raider, cost per available seat-mile, creative destruction, crony capitalism, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, Golden Gate Park, hiring and firing, housing crisis, index fund, it's over 9,000, Jeff Bezos, John Bogle, Joseph Schumpeter, Larry Ellison, late fees, legacy carrier, McMansion, moral hazard, multilevel marketing, new economy, pets.com, Ponzi scheme, Ronald Reagan, short selling, short squeeze, Silicon Valley, Snapchat, South of Market, San Francisco, Steve Jobs, survivorship bias, Upton Sinclair, Vanguard fund, young professional

Bailing out politically connected bondholders while millions of struggling homeowners got nothing wasn’t just unfair, it was destructively unfair. We heard a lot of talk about “moral hazard” during and after the financial crisis. But I don’t think people really understand what that phrase means, or at least how truly dangerous it is. If you prevent failing businesses from restructuring—not just small businesses, but large and important businesses as well—then the managements of those firms lose any incentive to make smart, prudent decisions. They know they can take all the risk they want because they’ll never have to suffer the consequences. That’s bad enough. But moral hazard has had an even more pernicious effect than corrupting the behavior of our business leaders.

., 227 Kmart, 39 Krispy Kreme Doughnuts, 46–47 Lay, Ken, 15, 29 layoffs, 28, 55, 80, 132, 143, 186 Lewis, Michael, 25 Lipper Analytical Services, 55 Lorenzo, Frank, 20, 132–38, 140, 171 Lynch, Peter, 194–95, 207 M-1 (aggregated money supply), 152–53, 157, 176 MacKay, Charles, 85 Madoff, Bernard, 30–32, 222, 224 Mandel, Stephen, 170–71, 187 manias biotech and, 97 dangers of, 12, 41, 88, 104, 174, 206 dotcom, 78, 84, 173, 205 failure and, 5, 85, 93–95, 111 GARP and, 41 health care and, 107 historical myopia and, 92 housing and, 182 identifying, 91–92 irrational exuberance and, 88 oil and, 201 renewable energy and, 94 start-ups and, 94 storytelling and, 91, 97, 120 Marx, Karl, 169 McDonald’s, 46, 76 Merrill Lynch, 58, 107–9, 111, 113 Microsoft, 153, 160, 212 Mill Valley, California, 38, 63, 65 MiniScribe, 150–52 MLM (multi-level marketing), 105 Montgomery Securities, 73, 165, 199, 201–2 moral hazards, 234 Mormons, 96, 105 NASDAQ, 31, 33 “negative rebate fee,” 181 Netflix, 116, 119–23 Neuman, Alfred E., 141 New York Stock Exchange, 146 Newsweek, 121 Nordic Track, 72 oil boom, 8, 26, 85, 92, 199 bust, 18, 22, 26, 53, 104, 114, 153, 155 First National and, 199 Global Marine and, 8–9, 11–13 investment and, 103 offshore drilling, 8 prices, 2, 8–9, 12 Texas and, 11–15, 53, 85, 104, 114, 153, 155, 201 On the Brink (Paulson), 233 Oppenheimer & Co., 58–59 Oracle, 93, 153 Orange County, California, 19–22, 143 Oyster Point, 78–79 PageNet (PAGE), 124, 126 Paine Webber, 88 Palm, 164 Paulson, Henry, 233 Paulson, John, 210 PayPal, 84 PlanetRx (PLRX), 78–82, 86, 91 power suppliers, 16 power worship, 206, 208 Prechter, Robert, 204–5 Price Club, 37, 39 Provenge, 157–58 quick service restaurants (QSR), 46 Quokka Sports (QKKA), 89–93, 119 Raymond, Geoff, 7–11, 14, 21, 35, 40, 44, 133, 137, 171, 197 RBS, 58 recession, 173, 177, 182, 184, 229 renewable energy, 94 Robertson, Julian, 210 Robertson Stephens, 165 Rocker, David, 5, 58 Rollerblades, 69–72, 130 Safeway, 83 Sahaf, Mohammed Said al, 123 Salomon Smith Barney, 205 Sam’s Club, 47 Sarbanes-Oxley, 181 scaling, 78, 86 Sears, 39 Securities and Exchange Commission (SEC), 31, 59, 224 self-delusion, 32 self-improvement, 72 September 11, 2001, 63, 155, 173 Shaman Pharmaceuticals (SHMN), 101–5, 119 Shearson Lehman Brothers, 204 Sherden, William A., 204–5 SHL Systemshouse (SBN), 201 shock therapy, 138–40 Signet (SIG), 187 Silk Greenhouse, 161–63, 167 Sinclair, Upton, 197 “sluggish economy,” 155–56, 176 Smith, Adam, 1 Smith, Gary, 54, 112, 114, 236 snake oil, 105–6 Snapchat, 94 Southwest Airlines, 136, 140 Starbucks, 33, 36–42, 47, 127, 173, 179 start-ups, 23, 81, 77, 94 Strachman, Daniel, 210 Super Bowl, 93 supercycles, 13–14, 25, 145, 182 Supermedia (SPMD), 57–59 synergies, 121, 166 Texas Air, 132–33, 137–39 Texas Commerce Bank, 7–8, 10, 14, 25–27, 137 TGI Fridays, 17–18, 24 Tiger Management Hedge Fund, 210 Transco, 15, 29 TXU Electric Delivery, 14, 16–17 Tyco, 51 Ultimate Electronics (ULTE), 126–28 “unbanked” customers, 68 value investing, 8, 16–18, 40 Value Merchants (VLMR), 43–47, 162–63 Vanguard, 58, 207, 212 Vera Wang, 184–85, 193 Walgreens, 76 Walmart, 83, 175–77, 193 Washington Mutual (WaMu), 233 Watson, Thomas J., 1 Webvan, 81–83, 86–88 Welch, Jack, 115 Westwood One Radio (WON), 201 Wiles, Q.


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What's Wrong With Economics: A Primer for the Perplexed by Robert Skidelsky

additive manufacturing, agricultural Revolution, behavioural economics, Black Swan, Bretton Woods, business cycle, carbon tax, Cass Sunstein, central bank independence, cognitive bias, conceptual framework, Corn Laws, corporate social responsibility, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, degrowth, disruptive innovation, Donald Trump, Dr. Strangelove, full employment, George Akerlof, George Santayana, global supply chain, global village, Gunnar Myrdal, happiness index / gross national happiness, hindsight bias, Hyman Minsky, income inequality, index fund, inflation targeting, information asymmetry, Internet Archive, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labour market flexibility, loss aversion, Mahbub ul Haq, Mark Zuckerberg, market clearing, market friction, market fundamentalism, Martin Wolf, means of production, Modern Monetary Theory, moral hazard, paradox of thrift, Pareto efficiency, Paul Samuelson, Philip Mirowski, Phillips curve, precariat, price anchoring, principal–agent problem, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, shareholder value, Silicon Valley, Simon Kuznets, sunk-cost fallacy, survivorship bias, technoutopianism, The Chicago School, The Market for Lemons, The Nature of the Firm, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, Tragedy of the Commons, transaction costs, transfer pricing, Vilfredo Pareto, Washington Consensus, Wolfgang Streeck, zero-sum game

The causation is one-way: from the individual to the group. The group has no power to modify individual interest, only to secure its most efficient expression. But the new institutionalists have identified a flaw that makes all institutions precarious as agents of individual purpose: the principal-agent problem, a form of moral hazard which describes a mismatch between people’s incentives and responsibilities. The principal wants to maximise something and the agent is employed to act on the principal’s behalf. The problem arises from the fact that the information possessed by the principal and the agent is unequal, or asymmetric.

The attempt in the 1970s to control inflation by wage and price controls led directly to a ‘crisis of governability’, as trade unions, particularly in Britain, refused to accept them. Large state subsidies to producer groups, both public and private, fed the typical corruptions of behaviour identified by the new right: rent-seeking, moral hazard, free-riding. Palpable evidence of government failure obliterated memories of market failure. The new generation of economists abandoned Keynes and, with the help of sophisticated mathematics, reinvented the classical economics of the self-regulating market. Battered by the inflationary crises of the 1970s, governments caved in to the ‘inevitability’ of free market forces.

The current ‘owners’ of the planet have a duty to future owners to preserve the value of their inheritance. Economists, typically, work out what this duty will cost them. One branch, ‘environmental economics’, argues that the environment is an important economic resource, and environmental damage represents a cost that is not borne by those who have caused it. This creates a problem of moral hazard, where companies can create pollution and leave others (in this case, future generations) to deal with the problems. This means that the costs of polluting the planet must be ‘priced in’ through carbon taxes. The second, more radical approach is ‘ecological economics’. This accepts the idea of protecting the environment, but rejects the claim that all aspects of environmental degradation can be correctly priced.


pages: 245 words: 75,397

Fed Up!: Success, Excess and Crisis Through the Eyes of a Hedge Fund Macro Trader by Colin Lancaster

"World Economic Forum" Davos, Adam Neumann (WeWork), Airbnb, Alan Greenspan, always be closing, asset-backed security, beat the dealer, Ben Bernanke: helicopter money, Bernie Sanders, Big Tech, Black Monday: stock market crash in 1987, bond market vigilante , Bonfire of the Vanities, Boris Johnson, Bretton Woods, business cycle, buy the rumour, sell the news, Carmen Reinhart, Chuck Templeton: OpenTable:, collateralized debt obligation, coronavirus, COVID-19, creative destruction, credit crunch, currency manipulation / currency intervention, deal flow, Donald Trump, Edward Thorp, family office, fear index, fiat currency, fixed income, Flash crash, George Floyd, global macro, global pandemic, global supply chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Growth in a Time of Debt, housing crisis, index arbitrage, inverted yield curve, Jeff Bezos, Jim Simons, junk bonds, Kenneth Rogoff, liquidity trap, lockdown, Long Term Capital Management, low interest rates, low skilled workers, margin call, market bubble, Masayoshi Son, Michael Milken, Mikhail Gorbachev, Minsky moment, Modern Monetary Theory, moral hazard, National Debt Clock, Nixon triggered the end of the Bretton Woods system, Northern Rock, oil shock, pets.com, Ponzi scheme, price stability, proprietary trading, quantitative easing, Reminiscences of a Stock Operator, reserve currency, Ronald Reagan, Ronald Reagan: Tear down this wall, Sharpe ratio, short selling, short squeeze, social distancing, SoftBank, statistical arbitrage, stock buybacks, The Great Moderation, TikTok, too big to fail, trickle-down economics, two and twenty, value at risk, Vision Fund, WeWork, yield curve, zero-sum game

I’m not talking about everyday risk taking and speculation, normal human greed. I’m not even talking about Gordon Gekko in the ‘80s. This is much more than “greed is good.” I’m talking about steal as much as you can, and if you’re wrong, we’ll bail you out. I’m talking about too big to fail and moral hazard. I’m talking about Rihanna playing to a bunch of hustlers at a mortgage convention boondoggle. “Does that mean that Greenspan caused it?” Jerry asks. I don’t think it’s the best question he could have asked. He has been doing this for seven or eight years now and should know this, but that’s what happens.

He created a new sound. It moves me. We could all use more boogie-woogie, some voodoo influence in our lives. “If I don’t do it, somebody else will …” I can hear him singing it. Maybe that should be our new slogan. Put it on our flags. Let people know what we all stand for. We should promote this new era of moral hazard. God rest his soul. The conference is focused on the toxins flowing through the markets. This is the stuff beneath the surface, not the shit that gets reported on the nightly news. Curve flattening, German yields negative out to thirty years, and EM volatility. No one likes to talk about this stuff; they don’t like to wreck the mood of a ten-year bull market.

And for fuck’s sake, let’s talk about the good stuff. Let’s talk bailouts. Whom are we going to give the free money to? Small businesses, hotels, restaurants, airlines? How about the ones that levered up by buying back their own stock to juice their executive compensation packages? Do you bail them out? Just another set of moral hazard problems. But this is not my problem. My problem is to survive. The big event today is a press conference set for 3 p.m., an hour before the markets close. The Big D makes his appearance thirty minutes late. He declares a national emergency in response to the outbreak. This is strategic. It frees up big amounts of money for him to dole out.


pages: 250 words: 79,360

Escape From Model Land: How Mathematical Models Can Lead Us Astray and What We Can Do About It by Erica Thompson

Alan Greenspan, Bayesian statistics, behavioural economics, Big Tech, Black Swan, butterfly effect, carbon tax, coronavirus, correlation does not imply causation, COVID-19, data is the new oil, data science, decarbonisation, DeepMind, Donald Trump, Drosophila, Emanuel Derman, Financial Modelers Manifesto, fudge factor, germ theory of disease, global pandemic, hindcast, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, implied volatility, Intergovernmental Panel on Climate Change (IPCC), John von Neumann, junk bonds, Kim Stanley Robinson, lockdown, Long Term Capital Management, moral hazard, mouse model, Myron Scholes, Nate Silver, Neal Stephenson, negative emissions, paperclip maximiser, precautionary principle, RAND corporation, random walk, risk tolerance, selection bias, self-driving car, social distancing, Stanford marshmallow experiment, statistical model, systematic bias, tacit knowledge, tail risk, TED Talk, The Great Moderation, The Great Resignation, the scientific method, too big to fail, trolley problem, value at risk, volatility smile, Y2K

Again, this is set out by McLaren and Markusson: If politicians continue to demand scenarios that deliver 1.5C or even 2C as carbon budgets are consumed, it seems highly likely that modellers will have little choice but to include [geoengineering by solar radiation management] in the next generation of models. All of these can-opener technologies contain a problem of ‘moral hazard’ – the difficulty that once there is perceived to be a quick fix, less effort is put into actually solving the root problem. Moral hazard is here reinforced by model hazard: as soon as solar radiation management geoengineering is programmed in to any of the Integrated Assessment Models, it will immediately become a go-to technology and a key pillar of the climate policy pathways that are deemed to be politically and economically feasible.

As they say, this constant reframing and redefinition of climate targets tends to defer and delay climate action – even when the intentions of those involved are largely positive – and this undermines the possibility of meaningful responses, as a result constantly shifting the burdens of climate risks onto more vulnerable people. From moral hazards to model hazards There is a modellers’ joke that plays on the arbitrary nature of model solutions and this kind of disconnect with the real world. It goes like this. A physicist, a chemist and an economist are shipwrecked on a desert island with nothing to eat but the ship’s store of canned food.


pages: 126 words: 37,081

Men Without Work by Nicholas Eberstadt

business cycle, Carmen Reinhart, centre right, deindustrialization, financial innovation, full employment, illegal immigration, jobless men, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labor-force participation, low skilled workers, mass immigration, moral hazard, post-work, Ronald Reagan, secular stagnation, Simon Kuznets, The Rise and Fall of American Growth, War on Poverty, women in the workforce, working-age population

If a “work first” principle informed our social welfare policies, we would be emphasizing training and education, job placement, tax credits—performance-conditioned benefits—instead of pensioning men off into permanent retirement in the prime of their lives at taxpayer expense. Twenty years ago—after a national consensus on the moral hazard of publicly subsidizing unwed motherhood finally crystallized—the United States enacted a largely successful “welfare reform” that brought millions of single mothers off welfare and into the workforce.6 It should be possible to form a national consensus to attempt something similar for our millions of idle, un-working, state-supported men of working age. Surely, the moral hazard of providing for them is no lower than providing for jobless single mothers who, unlike most un-working men, were largely busy raising children.


pages: 113 words: 37,885

Why Wall Street Matters by William D. Cohan

Alan Greenspan, Apple II, asset-backed security, bank run, Bear Stearns, Bernie Sanders, Blythe Masters, bonus culture, break the buck, buttonwood tree, Carl Icahn, corporate governance, corporate raider, creative destruction, Credit Default Swap, Donald Trump, Exxon Valdez, financial innovation, financial repression, Fractional reserve banking, Glass-Steagall Act, Gordon Gekko, greed is good, income inequality, Joseph Schumpeter, junk bonds, London Interbank Offered Rate, margin call, Michael Milken, money market fund, moral hazard, Potemkin village, quantitative easing, secular stagnation, Snapchat, South Sea Bubble, Steve Jobs, Steve Wozniak, tontine, too big to fail, WikiLeaks

The question in the United States has been how the consequences of the panics should be handled. Should the federal government intervene to save a bank or a Wall Street securities firm? Should the government have a role in encouraging the bad behavior of bankers through an implicit or explicit promise to bail them out if things go wrong—the so-called problem of creating a “moral hazard”? Go back 150 years, and the question was, should the federal government step in to save a failing railroad or a failing rope company? Usually, in our nation’s history the answer has been to let a bank fail if it’s going to fail or to let a railroad or a manufacturing company go into bankruptcy, and to let the market sort out the winners from the losers, to let the equity holders take it on the chin, and to let the creditors pick over the carcass.

It was created, she stated, to make the financial system safer. In fact, it would do nothing of the sort. The goal, Senator Warren wrote in the bill, was “to reduce risks to the financial system by limiting banks’ ability to engage in activities other than socially valuable core banking activities” and “to protect taxpayers and reduce moral hazard by removing explicit and implicit government guarantees for high-risk activities outside of the core business of banking.” Senator Warren’s bill went nowhere in the 113th Congress, in large part because it was simply a bad idea. So she and Senator McCain reintroduced it in June 2015. “Shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world,” Senator McCain said in a statement explaining why he thought the wall should be rebuilt.


pages: 137 words: 36,231

Information: A Very Short Introduction by Luciano Floridi

agricultural Revolution, Albert Einstein, bioinformatics, Bletchley Park, carbon footprint, Claude Shannon: information theory, Computing Machinery and Intelligence, conceptual framework, digital divide, disinformation, double helix, Douglas Engelbart, Douglas Engelbart, George Akerlof, Gordon Gekko, Gregor Mendel, industrial robot, information asymmetry, intangible asset, Internet of things, invention of writing, John Nash: game theory, John von Neumann, Laplace demon, machine translation, moral hazard, Nash equilibrium, Nelson Mandela, Norbert Wiener, Pareto efficiency, phenotype, Pierre-Simon Laplace, prisoner's dilemma, RAND corporation, RFID, Thomas Bayes, Turing machine, Vilfredo Pareto

Mark is underinformed, and this can lead to two well-known types of problems: moral hazard and adverse selection. An adverse selection scenario is one in which an absent-minded player like John is more likely to buy an insurance for his car battery because the underinformed player, like Mark, cannot adjust his response to him (e.g. by negotiating a higher premium) due to his lack of information (this is the relevant point here; Mark might also be bound by legal reasons even if he had enough information). A moral hazard scenario is one in which, once John has had the battery of his car insured, he behaves even less carefully, e.g. by leaving the lights on and the iPod re-charging, because Mark, the underinformed player, does not have enough information about his behaviour (or does not have the legal power to use such information; again, the point of interest here is the informational one).


pages: 426 words: 118,913

Green Philosophy: How to Think Seriously About the Planet by Roger Scruton

An Inconvenient Truth, barriers to entry, carbon credits, carbon footprint, carbon tax, Cass Sunstein, Climategate, Climatic Research Unit, corporate social responsibility, demand response, Easter island, edge city, endowment effect, energy security, Exxon Valdez, failed state, food miles, garden city movement, Garrett Hardin, ghettoisation, happiness index / gross national happiness, Herbert Marcuse, hobby farmer, Howard Zinn, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, joint-stock company, joint-stock limited liability company, Kenneth Arrow, knowledge economy, Lewis Mumford, market friction, Martin Wolf, moral hazard, Naomi Klein, New Urbanism, Peter Singer: altruism, phenotype, precautionary principle, rent-seeking, Robert Solow, Ronald Coase, Sam Peltzman, Silicon Valley, Simon Kuznets, tacit knowledge, the built environment, The Death and Life of Great American Cities, the market place, Thomas Malthus, Tragedy of the Commons, transaction costs, University of East Anglia, urban planning, urban sprawl, Vilfredo Pareto, women in the workforce, zero-sum game

The answer to that question defines the difference between left and right. Burke is arguing that movements destroy social capital, little platoons preserve it. And the conservative will say that the same is true of environmental capital too. Before leaving this topic it is important to address the issue of ‘moral hazard’ – the situation in which individuals or institutions are effectively insulated from the full costs of their choices, either by private insurance or by state support. Private insurance increases with the risk, and imposes a measure of self-discipline on the person who purchases it. Insurance offered by the state, however, is cost-free and open to exploitation.

Those who insure against risk are taking the cost of it on themselves, and also making a properly priced contribution to putting things right, should the risk materialize. Insurance is another aspect of the homeostasis on which durable communities depend, and its widespread existence in America is one reason why American communities recover so quickly from shocks and disasters. This is not to deny that insurance too is a source of moral hazard, tempting people to take risks that they should not be taking and shifting the cost of risk from the imprudent to the prudent. However, devices have evolved (such as incremental premiums and no-claims bonuses) that help to return the costs of foolishness to the fool.191 So far in this chapter I have been offering a qualified defence of the position normally identified with the ‘right’ in the discussion of environmental problems – the position according to which the market is not the problem but one part of the solution, with the state playing a subordinate role in the control of externalities.

Those two remarkable seventeenth-century inventions secured the preeminence of the Dutch and the British in international trade. They have done more to encourage free enterprise than virtually any other legal instruments by enabling small and vulnerable investors to risk their savings in business, without risking everything else. But they have also created moral hazards that seem fully to justify the anger and scorn that so many people (and not only those on the left) feel towards the unbridled capitalist economy. By separating ownership from control, and insulating both the shareholder and the director from the full costs of their mistakes, these legal devices encourage risk-taking beyond anything that the market would otherwise allow.


pages: 272 words: 83,798

A Little History of Economics by Niall Kishtainy

Alvin Roth, behavioural economics, British Empire, Capital in the Twenty-First Century by Thomas Piketty, car-free, carbon tax, central bank independence, clean water, Corn Laws, Cornelius Vanderbilt, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Dr. Strangelove, Eugene Fama: efficient market hypothesis, first-price auction, floating exchange rates, follow your passion, full employment, George Akerlof, Great Leap Forward, greed is good, Hyman Minsky, inflation targeting, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, loss aversion, low interest rates, market clearing, market design, means of production, Minsky moment, moral hazard, Nash equilibrium, new economy, Occupy movement, Pareto efficiency, Paul Samuelson, Phillips curve, prisoner's dilemma, RAND corporation, rent-seeking, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Solow, Ronald Reagan, sealed-bid auction, second-price auction, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade route, Vickrey auction, Vilfredo Pareto, washing machines reduced drudgery, wealth creators, Winter of Discontent

Adverse selection happens when important characteristics are unknown by buyers or sellers, such as when a buyer doesn’t know how good a car is, or a seller of insurance knows little about the health of a potential customer. Markets also get disrupted when people’s actions are unknown. Economists call it ‘moral hazard’. After you’ve bought insurance against the loss of your mobile phone you might get careless with it because you know that you’ll get a new one if you leave it on the bus. Insurance companies know this, but can’t check up on you. As a consequence, they won’t want to insure you completely. They might ask you to cover some portion of any loss.

Huge amounts of money flowed into the economies of East Asia but, as we saw earlier, in 1997 those countries struck economic rocks. Foreign lenders hadn’t worried enough about whether the people they were lending to would be able to repay the loans. They’d made the loans on the basis of poor information, and in the end many of the borrowers weren’t able to repay. Moral hazard made things worse because lenders expected to be rescued by governments if things went wrong, so had no incentive to be careful about who they were lending to. Well-functioning financial markets depend on lenders being able to accurately assess how reliable borrowers are, and on investors understanding the riskiness of the projects they put their money into.

(i), (ii) Kerala (India) (i) Keynes, John Maynard (i), (ii), (iii), (iv), (v), (vi) Keynesian theory (i), (ii), (iii) Klemperer, Paul (i) Krugman, Paul (i), (ii) Kydland, Finn (i), (ii) labour (i) in ancient Greece (i) and market clearing (i) women as unpaid (i) labour theory of value (i), (ii) laissez-faire (i) landowners (i), (ii), (iii) Lange, Oskar (i) law of demand (i), (ii) leakage of spending (i) Lehman Brothers (i) leisure class (i) leisured, women as (i) Lenin, Vladimir Ilyich (i), (ii) Lerner, Abba (i) Lewis, Arthur (i) Lincoln, Abraham (i) List, Friedrich (i) loss aversion (i) Lucas, Robert (i), (ii) MacKay, Charles (i) Macmillan, Harold (i) macro/microeconomics (i) Malaysia, and speculators (i) Malthus, Thomas (i), (ii), (iii) Malynes, Gerard de (i), (ii) manufacturing (i), (ii) division of labour (i) see also Industrial Revolution margin (i) marginal costs (i), (ii) marginal principle (i), (ii), (iii) marginal revenue (i) marginal utility (i), (ii) market, the (i) market clearing (i) market design (i) market failure (i), (ii), (iii), (iv) ‘Market for Lemons, The’ (Akerlof) (i) market power (i) markets, currency (i), (ii) Marshall, Alfred (i), (ii), (iii), (iv), (v) Marx, Karl (i), (ii), (iii), (iv), (v), (vi), (vii) Marxism (i) mathematics (i), (ii), (iii) means of production (i) mercantilism (i), (ii) Mesopotamia (i) Mexico, pegged currency (i) micro/macroeconomics (i) Microsoft (i) Midas fallacy (i) minimum wage (i) Minsky, Hyman (i) Minsky moment (i), (ii) Mirabeau, Marquis de (i), (ii), (iii) Mises, Ludwig von (i), (ii), (iii), (iv) mixed economies (i), (ii) Mobutu Sese Seko (i) model villages (i) models (economic) (i), (ii), (iii), (iv) modern and traditional economies (i), (ii) monetarism (i) monetary policy (i), (ii) money (i), (ii), (iii), (iv), (v), (vi) see also coins; currency money illusion (i) money wages (i) moneylending see usury monopolies (i), (ii) monopolistic competition (i), (ii) monopoly, theory of (i) monopoly capitalism (i), (ii), (iii) monopsony (i) moral hazard (i), (ii) multiplier (i) Mun, Thomas (i), (ii), (iii) Muth, John (i) Nash, John (i), (ii) Nash equilibrium (i) national income (i), (ii), (iii), (iv), (v) National System of Political Economy (List) (i) Nelson, Julie (i) neoclassical economics (i) net product (i) Neumann, John von (i) New Christianity, The (Saint-Simon) (i) new classical economics (i) New Harmony (Indiana) (i) New Lanark (Scotland) (i) Nkrumah, Kwame (i), (ii) non-rival good (i) Nordhaus, William (i), (ii) normative economics (i), (ii) Obstfeld, Maurice (i) Occupy movement (i) oligopolies (i) opportunity cost (i), (ii) organ transplant (i) output per person (i) Owen, Robert (i) paper money (i), (ii) Pareto, Vilfredo (i) pareto efficiency (i), (ii) pareto improvement (i) Park Chung-hee (i) partial equilibrium (i) pegged exchange rate (i) perfect competition (i), (ii), (iii), (iv), (v) perfect information (i) periphery (i) phalansteries (i) Phillips, Bill (i) Phillips curve (i), (ii), (iii), (iv), (v), (vi), (vii) physiocracy (i), (ii) Pigou, Arthur Cecil (i), (ii), (iii) Piketty, Thomas (i), (ii), (iii) Plato (i), (ii), (iii) policy discretion (i) Ponzi, Charles (i) Ponzi finance (i) population and food supply (i), (ii), (iii) of women (i) positive economics (i) poverty (i), (ii), (iii), (iv), (v) in Cuba (i) Sen on (i) and utopian thinkers (i) Prebisch, Raúl (i) predicting (i) Prescott, Edward (i), (ii) price wars (i), (ii) primary products (i) prisoners’ dilemma (i) private costs and benefits (i) privatisation (i) productivity (i), (ii), (iii) profit (i), (ii), (iii), (iv) and capitalism (i), (ii) proletariat (i), (ii) property (private) (i), (ii), (iii), (iv), (v) and communism (i), (ii), (iii), (iv) protection (i), (ii), (iii) provisioning (i) public choice theory (i) public goods (i) quantity theory of money (i) Quesnay, François (i) Quincey, Thomas de (i), (ii) racism (i) Rand, Ayn (i) RAND Corporation (i), (ii) rate of return (i), (ii) rational economic man (i), (ii), (iii), (iv), (v) rational expectations (i), (ii), (iii), (iv), (v) real wages (i), (ii), (iii) recession (i) and governments (i), (ii), (iii) Great Recession (i) Keynes on (i), (ii) Mexican (i) redistribution of wealth (i) reference points (i) relative poverty (i) rent on land (i), (ii), (iii) rents/rent-seeking (i) resources (i), (ii) revolution (i), (ii), (iii), (iv) Cuban (i) French (i), (ii), (iii), (iv) Russian (i), (ii) Ricardo, David (i), (ii), (iii) risk aversion (i) Road to Serfdom, The (Hayek) (i) robber barons (i) Robbins, Lionel (i) Robinson, Joan (i) Roman Empire (i) Romer, Paul (i) Rosenstein-Rodan, Paul (i) Roth, Alvin (i), (ii) rule by nature (i) rules of the game (i) Sachs, Jeffrey (i) Saint-Simon, Henri de (i) Samuelson, Paul (i), (ii) savings (i), (ii) and Say’s Law (i) Say’s Law (i) scarcity (i), (ii), (iii), (iv), (v), (vi) Schumpeter, Joseph (i), (ii) sealed bid auction (i) second price auction (i) Second World War (i) securitisation (i) self-fulfilling crises (i) self-interest (i) Sen, Amartya (i), (ii) missing women (i), (ii), (iii) services (i) shading bids (i), (ii) shares (i), (ii), (iii), (iv), (v), (vi) see also stock market Shiller, Robert (i), (ii) signalling (i) in auctions (i) Smith, Adam (i), (ii), (iii), (iv), (v) social costs and benefits (i) Social Insurance and Allied Services (Beveridge) (i) social security (i), (ii) socialism (i), (ii), (iii), (iv), (v) socialist commonwealth (i) Socrates (i) Solow, Robert (i) Soros, George (i), (ii), (iii) South Africa, war with Britain (i) South Korea, and the big push (i) Soviet Union and America (i) and communism (i), (ii) speculation (i) speculative lending (i) Spence, Michael (i) spending government (fiscal policy) (i), (ii), (iii), (iv), (v), (vi), (vii) and recessions (i), (ii) and Say’s Law (i) see also investment stagflation (i), (ii) Stalin, Joseph (i) standard economics (i), (ii), (iii), (iv) Standard Oil (i) Stiglitz, Joseph (i) stock (i) stock market (i), (ii), (iii), (iv), (v) stockbrokers (i) Strassmann, Diana (i), (ii) strategic interaction (i), (ii) strikes (i) subprime loans (i) subsidies (i), (ii) subsistence (i) sumptuary laws (i) supply curve (i) supply and demand (i), (ii), (iii), (iv) and currencies (i) and equilibrium (i), (ii) in recession (i), (ii), (iii) supply-side economics (i) surplus value (i), (ii) Swan, Trevor (i) tariff (i) taxes/taxation (i) and budget deficit (i) carbon (i) and carbon emissions (i) and France (i) and public goods (i) redistribution of wealth (i) and rent-seeking (i) technology as endogenous/exogenous (i) and growth (i) and living standards (i) terms of trade (i) Thailand (i) Thaler, Richard (i) theory (i) Theory of the Leisure Class, The (Veblen) (i) Theory of Monopolistic Competition (Chamberlain) (i) Thompson, William Hale ‘Big Bill’ (i) threat (i) time inconsistency (i), (ii) time intensity (i) Tocqueville, Alexis de (i) totalitarianism (i) trade (i), (ii), (iii) and dependency theory (i) free (i), (ii), (iii) trading permit, carbon (i) traditional and modern economies (i), (ii) transplant, organ (i) Treatise of the Canker of England’s Common Wealth, A (Malynes) (i) Tversky, Amos (i), (ii) underdeveloped countries (i) unemployment in Britain (i) and the government (i) and the Great Depression (i) and information economics (i) and Keynes (i) and market clearing (i) and recession (i) unions (i), (ii) United States of America and free trade (i) and growth of government (i) industrialisation (i) and Latin America (i) Microsoft (i) recession (i), (ii) and the Soviet Union (i) and Standard Oil (i) stock market (i) wealth in (i) women in the labour force (i) unpaid labour, and women (i) usury (i), (ii), (iii) utility (i), (ii), (iii), (iv) utopian thinkers (i), (ii) Vanderbilt, Cornelius (i), (ii) Veblen, Thorstein (i), (ii), (iii) velocity of circulation (i), (ii) Vickrey, William (i) wage, minimum (i) Walras, Léon (i) Waring, Marilyn (i) wealth (i) and Aristotle (i), (ii) and Christianity (i) Piketty on (i) and Plato (i) Smith on (i) Wealth of Nations, The (Smith) (i), (ii) welfare benefits (i), (ii), (iii), (iv) welfare economics (i) Who Pays for the Kids?


pages: 330 words: 83,319

The New Rules of War: Victory in the Age of Durable Disorder by Sean McFate

Able Archer 83, active measures, anti-communist, barriers to entry, Berlin Wall, blood diamond, Boeing 747, Brexit referendum, cognitive dissonance, commoditize, computer vision, corporate governance, corporate raider, cuban missile crisis, disinformation, Donald Trump, double helix, drone strike, escalation ladder, European colonialism, failed state, fake news, false flag, hive mind, index fund, invisible hand, John Markoff, joint-stock company, military-industrial complex, moral hazard, mutually assured destruction, Nash equilibrium, nuclear taboo, offshore financial centre, pattern recognition, Peace of Westphalia, plutocrats, private military company, profit motive, RAND corporation, ransomware, Ronald Reagan, Silicon Valley, South China Sea, Steve Bannon, Stuxnet, Suez crisis 1956, technoutopianism, vertical integration, Washington Consensus, Westphalian system, yellow journalism, Yom Kippur War, zero day, zero-sum game

This introduces new strategic possibilities known to CEOs but alien to generals, putting us at risk. Second, the fact of private warfare lowers the barriers to entry for war. Hiring mercenaries allows clients to fight without having their own blood on the gambling table, and this creates what economists call “moral hazard.” Think of moral hazard like renting a car. Some people abuse the heck out of rented automobiles. Want to drive on train tracks at one hundred miles per hour? No problem. You would never do it to your own car, because it would cause long-term damage, but why worry if it’s someone else’s vehicle? You will never have to deal with the consequences, and this lack of personal responsibility encourages bad behavior in some drivers.

(West Point), 235, 236 Military budget, 37–38, 41, 46, 47, 50, 102, 106–7, 445 Military contractors, 51, 101–2, 128–31 Military education, 235–40 Military force, declining utility of, 104–8 Military-industrial complex, 50, 166–67 Militias, 3, 101, 123–24, 153 Mimicry operations, 191 Mitchell, William “Billy,” 17–19, 20, 238, 249, 250 Mobutu Sese Seko, 157 Montgomery, Bernard, 234 Moral corruption, 113 “Moral hazard,” 186–87 More, Thomas, 127 Morocco, 97 Mueller, Robert, 202 Mutually assured destruction (“MAD”), 78–79 Myanmar, 150 My Lai massacre, 122 Myth-busting, 111 Myth of bifurcated victory, 232–33, 235 Napoleon Bonaparte, 32, 230, 250 Narco-wars. See Drug wars Narrative, controlling the, 41, 66, 67–68, 108–13, 227 Nash equilibrium, 161 Nasrallah, Hassan, 242 Natanz nuclear facility, 16 National debt, 46, 167 National Defense University, 23, 71, 232–33, 237–38 National guard vs. active duty, realignment of, 38–40 Nationalism, 105 National Security Agency, 137–38, 202 National Security Strategy, 75, 76–77 Nation-building, 4, 93–94, 150 Nation-states, 8, 247 conventional war and, 30–32 retreat of, 147–50 NATO (North Atlantic Treaty Organization), 2, 13, 21, 33, 37, 103–4, 168, 200, 245 Naval training, 55–57 Navy SEALs, 38, 172 Newbold, Gregory, 263n New Rules of War, 6, 9–10, 80, 248 New superpowers.


pages: 309 words: 85,584

Nine Crises: Fifty Years of Covering the British Economy From Devaluation to Brexit by William Keegan

Alan Greenspan, banking crisis, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, Bretton Woods, Brexit referendum, British Empire, capital controls, congestion charging, deindustrialization, Donald Trump, Etonian, eurozone crisis, Fall of the Berlin Wall, financial engineering, financial innovation, financial thriller, floating exchange rates, foreign exchange controls, full employment, gig economy, inflation targeting, Jeremy Corbyn, Just-in-time delivery, light touch regulation, liquidity trap, low interest rates, Martin Wolf, military-industrial complex, moral hazard, negative equity, Neil Kinnock, Nixon triggered the end of the Bretton Woods system, non-tariff barriers, North Sea oil, Northern Rock, oil shock, Parkinson's law, Paul Samuelson, pre–internet, price mechanism, quantitative easing, Ronald Reagan, school vouchers, short selling, South Sea Bubble, Suez crisis 1956, The Chicago School, transaction costs, tulip mania, Winter of Discontent, Yom Kippur War

The key point is whether there is what is known technically as a ‘systemic rise’, that is to say, whether taking action would have wider, ominous implications for the economy at large. Another factor that has to be taken into account is what became known as an obsession of Governor King in 2007 when the Northern Rock crisis occurred. King was worried about ‘moral hazard’ – the fear that automatically rescuing a bank would encourage others to take excessive risks, knowing that they could expect to be bailed out by the government. Although the FSA was formally separated from the Bank – physically too, because it was located some miles downriver at Canary Wharf – there was in fact a tripartite system.

Indeed, in his instant memoir of the crisis, Darling disarmingly admits that, as shadow minister for the City in the run-up to the 1997 election, he had been largely responsible for the architecture of the FSA. There was a lot of bad blood between the Treasury and the Bank of England after the onset of the financial crisis. The Treasury itself was short of banking expertise but rapidly built it up. The Treasury was angry that the Governor made so much of what he saw as the dangers of ‘moral hazard’ – his concern being that rescuing one financial institution would be the thin end of the wedge for other miscreants. There was an amazing episode when the Treasury found that King was lying low in his country retreat and not answering calls, to the point where they had to despatch a messenger to deepest Kent to elicit a response.

K. 1, 2, 3, 4, 5, 6, 7 de Gaulle, Charles 1, 2, 3 George, Eddie 1, 2, 3, 4 Gilmour, Sir Ian 1, 2, 3, 4 ‘gilt strikes’ 1, 2 Giscard, Valéry 1, 2, 3, 4, 5 Godley, Wynne 1 Goodhart, Charles 1 Goodman, Geoffrey 1 Goodman, Lord 1 Goodwin, Fred 1 Gove, Michael 1 Government Economic Service 1, 2 Granita Agreement 1, 2 The Great Crash 1929 1 Great Depression 1, 2, 3, 4 Greene, Sidney 1 Greenspan, Alan 1, 2, 3, 4 Grexit 1 Guardian 1, 2, 3, 4, 5 Gwinner, Christopher 1 Hahn, Frank 1 Half In, Half Out: Prime Ministers on Europe 1 Hamilton, Adrian 1, 2, 3 Hammond, Philip 1 Harris, Anthony 1 Harris, John 1 Harris, Kenneth 1 Harris, Robert 1 Harrod, Dominick 1 Harvey-Jones, Sir John 1, 2 Hattersley, Roy 1, 2, 3 Healey, Denis 1, 2, 3, 4, 5, 6, 7 IMF crisis 1, 2, 3, 4, 5, 6 monetarism 1, 2 Observer interview 1 Heath, Edward 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12 EEC entry 1, 2, 3 oil crisis 1, 2, 3 secondary banking crisis 1 three-day week 1, 2, 3, 4, 5, 6 Hennessy, Peter 1 Heseltine, Michael 1 History of the Peloponnesian War 1 Hogg, Sarah 1 Honda 1 Hormats, Robert 1, 2 Hornby, Nick 1 Hornby, Sir Derek 1 ‘household economics’ 1, 2 Howard, Tony 1 Howe, Sir Geoffrey 1, 2, 3 monetarism 1, 2, 3, 4, 5, 6, 7, 8, 9 Observer interview 1 relationship with Thatcher 1, 2, 3, 4 HP (hire purchase) agreements 1 Hunt, John 1 Hurd, Douglas 1, 2, 3 Hutber, Patrick 1 Hutton, Will 1 ICI (Imperial Chemical Industries) 1, 2 IMF (International Monetary Fund) 1, 2, 3, 4, 5, 6 1976 crisis 1, 2, 3, 4, 5, 6, 7, 8 Brown’s proposed candidature 1, 2 IMFC (International Monetary and Financial Committee) 1 ‘In My View’ column 1 ‘In Place of Strife’ 1 Independent 1, 2 Industrial Relations Act (1971) 1, 2, 3 Ingrams, Richard 1, 2 Institute for Fiscal Studies 1, 2 Institute of Economic Affairs 1 Iran 1 Iraq War (2003) 1, 2, 3, 4 Jay, Peter 1, 2 Jenkin, Patrick 1, 2, 3 Jenkins, Roy 1, 2, 3, 4, 5, 6, 7, 8, 9 JMB (Johnson Matthey Bankers) 1, 2 Johnson, Boris 1 Joseph, Sir Keith 1, 2, 3 Kahn, Richard 1 Kaldor, Nicholas 1, 2, 3 Kaletsky, Anatole 1, 2, 3 Kaufman, Gerald 1, 2, 3 Keays, Sara 1 Keegan, Victor 1, 2 Keegan, William at Bank of England 1, 2, 3, 4, 5, 6 at Cambridge 1 Clarke interview 1 at Daily Mail 1, 2 at Financial Times 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 Fleet Street job offers 1, 2 Healey interview 1 Howe interview 1 as Keynesian 1, 2, 3, 4, 5 Lamont interview 1 Lawson interview 1 Major interview 1 at Observer 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12 Ker, Alan 1 Ketelaar, Titia 1 Keynes, John Maynard 1, 2, 3, 4, 5, 6 Keynesianism 1, 2, 3, 4 austerity policies 1, 2, 3, 4 of Keegan 1, 2, 3, 4, 5 and monetarism 1, 2, 3, 4, 5, 6 Khrushchev, Nikita 1 Kilmartin, Terence 1 King, Sir Mervyn 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 Kinnock, Neil 1, 2, 3 Kissinger, Henry 1, 2 Knight, Andrew 1 Krugman, Paul 1, 2, 3, 4 Kynaston, David 1 Laffer, Arthur 1 Lagarde, Christine 1 Lahnstein, Manfred 1, 2, 3 Lamont, Norman 1, 2, 3, 4 Black Wednesday 1, 2, 3, 4, 5, 6, 7, 8, 9 Observer interview 1 Lance, Bert 1 Laws, David 1 Lawson, Dominic 1 Lawson, Nigel 1, 2, 3, 4, 5, 6, 7 ERM entry 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16 monetarism 1, 2, 3, 4, 5, 6, 7 Observer interview 1 relationship with Thatcher 1, 2, 3, 4, 5 Lawson, Nigella 1, 2, 3 Le Carré, John 1, 2 Le Monde 1 Lederer, Lajos 1 Lehman Brothers 1 Leigh-Pemberton, Robin 1, 2, 3, 4, 5, 6 ‘Lex’ column 1, 2 Littler, Geoffrey 1 Llewellyn, John 1 Lloyd George, David 1 Lloyd, Selwyn 1, 2 Lonrho 1, 2, 3 Louvre Accord 1 LSE (London School of Economics) 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 Lyttelton, Oliver 1 Maastricht Treaty (1992) 1, 2, 3, 4, 5, 6 Macdonald, Alastair 1 MacDonald, Ramsay 1, 2 McDonnell, John 1 MacDougall, Sir Donald 1, 2, 3 McGahey, Mick 1 MacGregor, John 1, 2 McIntosh, Sir Ronald 1 McKie, David 1 Macleod, Iain 1 Macmillan, Harold 1, 2, 3, 4, 5, 6, 7, 8 EEC membership 1, 2, 3 National Economic Development Council 1 Macpherson, Sir Nicholas 1, 2 MacShane, Denis 1 ‘Madrid terms’ 1, 2 Major, John 1, 2, 3, 4, 5 Black Wednesday 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12 Clarke on 1, 2, 3 ERM entry 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12 Maastricht Treaty 1, 2, 3, 4, 5, 6 Observer interview 1 Marsh, David 1, 2 Marsh, Dick 1 Martin, Jurek 1 Marx, Karl 1 Maudling, Reginald 1, 2, 3, 4, 5, 6, 7 devaluation crisis 1, 2, 3, 4 May, Theresa 1, 2, 3, 4, 5 Meade, James 1 Menuhin, Yehudi 1 Mercer, Mike 1 Merkel, Angela 1 Midland Bank 1 Mill, John Stuart 1 Milne, Seumas 1 Mitchell, Sir Derek 1 monetarism 1, 2, 3, 4, 5, 6 and Keynesianism 1, 2, 3, 4, 5, 6 Thatcher government 1, 2, 3, 4, 5 monetary aggregates 1 Money Mail 1 Monnet, Jean 1 Monopolies Commission 1 moral hazard 1, 2 More Than a Game: The Story of Cricket’s Early Years 1 MPC (Monetary Policy Committee) 1, 2 Mr Osborne’s Economic Experiment 1 Mrs Thatcher’s Economic Experiment 1 ‘multiplier’ theory 1 Murdoch, Rupert 1 Murray, John 1 Murray, Len 1 National Economic Development Council 1, 2, 3 National Economic Development Office 1, 2 National Institute of Economic and Social Research 1, 2, 3, 4 National Plan 1, 2, 3 National Union of Mineworkers 1, 2 National Union of Railwaymen 1 NatWest 1 Neild, Robert 1, 2, 3, 4, 5 New York Times 1 Newsweek 1 Newton, Gordon 1, 2, 3, 4, 5, 6, 7, 8 Norman, Jesse 1 Norman, Montagu 1, 2 North Sea oil 1, 2, 3, 4, 5 Northern Rock 1, 2, 3, 4, 5, 6, 7, 8, 9 Obama, Barack 1 OBR (Office for Budget Responsibility) 1 O’Brien, Conor Cruise 1 O’Brien, Sir Leslie 1, 2 Observer austerity policies 1, 2, 3 Brexit 1, 2 Clarke interview 1 financial crisis 1, 2 Healey interview 1 Howe interview 1 job offer 1 Keegan at 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12 Lamont interview 1 Lawson interview 1 Major interview 1 monetarism 1 O’Donnell, Gus 1 OECD (Organisation for Economic Co-operation and Development) 1, 2 oil crisis (1973) 1, 2, 3, 4, 5 OMFIF (Official Monetary and Financial Institutions Forum) think tank 1, 2 OPEC (the Organization of the Petroleum Exporting Countries) 1, 2 Osborne, George 1, 2, 3, 4 austerity policies 1, 2, 3, 4, 5, 6, 7 relationship with Cameron 1, 2 Oxford Mail 1 Paish, Frank 1 Palmer, John 1 Parkinson, C.


pages: 310 words: 85,995

The Future of Capitalism: Facing the New Anxieties by Paul Collier

"Friedman doctrine" OR "shareholder theory", accounting loophole / creative accounting, Airbnb, An Inconvenient Truth, assortative mating, bank run, Bear Stearns, behavioural economics, Berlin Wall, Bernie Sanders, bitcoin, Bob Geldof, bonus culture, business cycle, call centre, central bank independence, centre right, commodity super cycle, computerized trading, corporate governance, creative destruction, cuban missile crisis, David Brooks, delayed gratification, deskilling, Donald Trump, eurozone crisis, fake news, financial deregulation, full employment, George Akerlof, Goldman Sachs: Vampire Squid, greed is good, income inequality, industrial cluster, information asymmetry, intangible asset, Jean Tirole, Jeremy Corbyn, job satisfaction, John Perry Barlow, Joseph Schumpeter, knowledge economy, late capitalism, loss aversion, Mark Zuckerberg, minimum wage unemployment, moral hazard, negative equity, New Urbanism, Northern Rock, offshore financial centre, out of africa, Peace of Westphalia, principal–agent problem, race to the bottom, rent control, rent-seeking, rising living standards, Robert Shiller, Robert Solow, Ronald Reagan, shareholder value, Silicon Valley, Silicon Valley ideology, sovereign wealth fund, The Wealth of Nations by Adam Smith, theory of mind, too big to fail, trade liberalization, urban planning, web of trust, zero-sum game

But I already know the incomes I will receive from my state and university pensions: I am secure until death. Not so, many others. Risks can easily be pooled, and for most types of risk, if they are pooled they evaporate. The reason for caution in pooling risks is ‘moral hazard’. In some situations, once the risk is shared, everyone takes greater risks: because we all have fire insurance we are more careless. But one risk borne by many pensioners involves no moral hazard whatsoever: it is the risk involved in all defined-contribution pension schemes. Virtually all firms have decided that defined benefit schemes such as my own are ruinously expensive. My own scheme, for British universities, bears this out; it has accumulated the largest deficit in a pension fund ever recorded.

., 120–21 business zones, 150 ‘Butskellism’, 49* Cadbury, 77 Cameron, David, 205 Canada, 22 capitalism competition, 21, 25, 56, 85, 86 ‘creative destruction’ concept, 21 current failings of, 4–5, 17, 25, 42, 45–6, 48, 201, 212–13 and decline of social trust, 5, 45–6, 48, 55, 59, 69 as essential for prosperity, 4–5, 18, 20, 25, 201 and families, 37 first mover advantage, 148 and greed, 10, 19, 25–7, 28, 31, 42, 58, 69, 70†, 81, 95 and Marx’s alienation, 17–18 and oppositional identities, 56, 74 vested interests, 85, 86, 135–6, 207 see also firms Catalan secession movement, 58 causality, narrative of, 33, 34 CDC Group, 122, 149* Chaucer, Geoffrey, The Canterbury Tales, 129 Chicago, University of, 166 childhood adoption, 110–11 children in ‘care’, 104, 105, 110, 111, 157 children ‘reared by wolves’, 31–2 cognitive development, 105–6, 170, 175–6 fostering, 104, 105, 111 identity acquisition, 32 impact of parental unemployment, 160–61 learning of norms, 33, 35, 107–8 non-cognitive development, 105, 163, 169–70, 171–3, 174, 175–6 ‘rights of the child’ concept, 103–4 in single-parent families, 101, 102, 104–5, 155, 160 trusted mentors, 169–70 see also family China, 118–19, 149, 203 Chira, Susan, 52–3 Chirac, Jacques, 14, 120–21 Christian Democratic parties, 5, 14 Citigroup, 186 Clark, Gregory, The Son Also Rises, 106–8 Clarke, Ken, 206 class divide assortative mating among new elite, 99–100, 154, 188–9 author’s proposed policies, 19–20, 21, 183–4, 187–8, 190, 207–8 and breadth of social networks, 169 and Brexit vote, 5, 196 and cognitive development, 105–6 divergence dynamic, 7, 18, 48, 98–108, 154–61, 170–71, 172–80, 181–90 ‘elite’ attitudes to less-well educated, 4, 5, 12, 16, 53, 59, 60–61, 63 and family life, 20, 98, 99–106, 157–62 and fracture to skill-based identities, 3–5, 51–6, 78 and home ownership, 68, 181, 182–3 need for socially mixed schools, 164–5 and non-cognitive development, 105, 163, 169–70, 171–3, 174, 175–6 and parental hothousing, 100, 101, 105–6 post-school skills development, 170–76 pre-emptive support for stressed families, 20, 155, 157–60, 161–3, 208 and reading in pre-teens, 167–9 and recent populist insurgencies, 5 retirement insecurities, 179–80 and two-parent families, 155–6, 157 unravelling of shared identity, 15, 50, 51–6, 57*, 58–61, 63, 215 see also white working class climate change, 44, 67, 119 Clinton, Hillary, 5, 9, 203–4 coalition government, UK (2010–15), 206 cognitive behavioral therapy, 160 Cold War, 113, 114, 116 end of, 5–6, 115, 203 Colombia, 120 communism, 32, 36–7, 85–6 communitarian values care, 9, 11, 12, 16, 29, 31, 42, 116 fairness, 11, 12, 14, 16, 29, 31, 34, 43, 116, 132–3 hierarchy, 11, 12, 16, 38–9, 43, 99–100 left’s abandonment of, 16, 214* liberty, 11, 12, 16, 42 loyalty, 11, 12, 16, 29, 31, 34, 42–3, 116 new vanguard’s abandonment of, 9, 11–13, 14–15, 16, 17, 49–50, 113, 116–18, 121, 214 post-war settlement, 8–9, 49, 113–16, 122 and reciprocal obligations, 8–9, 11–12, 13, 14, 19, 33, 34, 40–41, 48–9, 201, 212–15 roots in nineteenth-century co-operatives, 8, 13, 14, 201 sanctity, 11, 16, 42–3 Smith and Hume, 21–2† values and reason, 29–30, 43–4 see also belonging, narrative of; obligation, narrative of; reciprocity; social democracy Companies Act, UK, 82 comparative advantage, 20, 120, 192, 194 Confederation of British Industry (CBI), 79 conservatism, 30, 36 Conservative Party, 14, 49, 205, 206 contraception, 98–9, 102 co-operative movement, 8, 13, 14, 201 Corbyn, Jeremy, 202, 204–5 Crosland, Anthony, The Future of Socialism, 17, 18, 19 Cuban Missile Crisis (1962), 114 debutante balls, 188 Denmark, 63, 178, 214* Descartes, Rene, 31 Detroit, 128, 129, 144 Deutsche Bank, 78, 185 development banks, 149–50 Development Corporations Act (1981), 150 Dickens, Charles, Bleak House, 108 digital networks detachment of narratives from place, 38, 61–2 economies of scale, 86–7 global e-utilities, 37, 38, 86–7, 89–90, 91 social media, 27, 61, 87, 173, 207, 215 value-based echo-chambers, 38, 61–2, 64–5, 212, 215 Draghi, Mario, 153 Dundee Project, 161–2 Dutch Antilles, 193 East Asia, 147, 192 eBay, 87 economic man, 10, 19, 25, 26–7, 31, 34–5, 196, 209, 210, 215 economic rent theory, 19, 91, 133–9, 140–44, 186–8, 192, 195, 207 education and collapse of social democracy, 50, 52, 53, 54, 55, 59, 63 and empathy, 12 and European identity, 57* expansion of universities, 99–100, 127 and growth of the middle class, 100 inequality in spending per pupil, 167 mis-ranking of cognitive and non-cognitive training, 174–6 need for socially mixed schools, 164–5 post-school skills development, 170–76 pre-school, 105–6, 163–4 quality of teaching, 165–6 reading in pre-teens, 167–9 and shocks to norms of ethical family, 98, 99–105 symbols of cognitive privilege, 175 teaching methods, 166–7 vocational education, 171–6 zero-sum aspects of success, 189 electoral systems, 206 Emerging Market economies, 129, 130–31 empires, age of, 113 The Enigma of Reason (Mercier and Sperber), 29 enlightened self-interest, 33, 40*, 97–8, 101, 109, 112, 113, 114, 117, 184, 213 Enron, 80 ethnicity, 3, 20, 56, 62, 64, 65, 211 Europe Christian Democrats in, 5, 14 class divides, 3, 4, 5, 125 decline in social trust, 45 and knowledge industries, 192 metropolitan-provincial divides, 3, 4, 125 and migration, 121, 197 and shared identity, 57–8, 64, 66, 125 social democracy in, 8–9, 49, 50 European Central Bank, 153 European Commission, 57 European Investment Bank, 149 European Union (EU, formerly EEC), 66, 67, 114, 115, 116, 117 Brexit vote (June 2016), 5, 125, 131, 196, 215 Eurozone crisis, 153 public policy as predominantly national, 212 universities in, 170 evolutionary theory, 31, 33†, 35–6, 66 externalities, 145–6 Facebook, 87 Fairbairn, Carolyn, 79 fake news, 33–4 family, 19 African norms, 110–11 benefits for single parents, 160 Clark’s ‘family culture’, 107–8 entitled individual vs family obligation, 99–103, 104–6, 108–9, 210 equality within, 39, 154 erosion of mutual obligations, 101–2, 210 identity acquisition, 32 ideologies hostile to, 36–7 impact of unemployment/poverty, 4, 7, 160–61 importance of, 36, 37 and increased longevity, 110, 161 in-kind support for parenting, 161 nuclear dynastic family, 102, 110, 154 one-parent families, 101, 102, 104–5, 155, 160 parental hothousing, 100, 101, 105–6 post-1945 ethical family, 97–8, 99–105, 108, 210 pressures on young parents, 159–60, 161–3 and public policy, 21, 154–5, 157–70, 171–3, 177, 209 and reciprocity, 97–8, 101, 102 shocks to post-1945 norms, 98–105 shrinking of extended family, 101–2, 109–10, 161 social maternalism concept, 154–5, 157–8, 190 two-parent families as preferable, 155–6, 157 see also childhood; marriage Farage, Nigel, 202 fascism, 6, 13*, 47, 113 Federalist papers, 82 feminism, 13, 99 Fillon, François, 204 financial crisis, global (2008–9), 4, 34, 71, 160 no bankers sent to gaol for, 95–6 financial sector, 77–9, 80–81, 83–5 asymmetric information, 88, 185 co-ordination role, 145–6 economies of scale, 87 localized past of, 84, 146 toxic rivalries in, 189 trading in financial assets, 78–9, 84, 184–5, 186, 187 Finland, 63 firms, 19, 21, 69 CEO pay, 77–8, 79, 80–81 competition, 21, 25, 56, 85, 86 control/accountability of, 75–81, 82–5 cultures of good corporate behaviour, 94–5 demutualization in UK, 83, 84 deteriorating behaviour of, 18, 69, 78, 80–81 economies of scale, 17–18, 37, 86–7, 88–91, 126–7, 144–5, 146–7 ethical, 70–71, 172, 209–10 and ethical citizens, 93–4, 95, 96 failure/bankruptcy of, 70, 71, 72, 74, 75–6 flattening of hierarchies in, 39 Friedman’s profit nostrum, 69–70, 71, 76, 78–9, 210 global e-utilities, 37, 38, 86–7, 89–90, 91 ideologies hostile to, 37, 81 low productivity-low cost business model, 173–4 ‘maximising of shareholder value’, 69–70, 76, 79, 82–3 ‘mutuals’, 83 need for bankslaughter crime, 95–6 new network features, 86–7 policing the public interest, 93–4 public dislike of, 69, 95–6 public interest representation on boards, 92–3 regulation of, 87–90, 174 reward linked to short-term performance, 77, 78–81 sense of purpose, 39–40, 41, 70–75, 80–81, 93–4, 96 shareholder control of, 76–7, 79, 80, 82–3 societal role of, 81–2, 92–3, 96, 209–10 utility services, 86, 89, 90 worker interests on boards, 83, 84–5 Fisher, Stephen, 196* Five Star, 125 Ford, 70, 71 France, 7, 63, 67, 114 écoles maternelles in, 164 labour market in, 176, 189 pensions policy, 180 presidential election (2017), 5, 9, 204 universities in, 170 working week reduced in, 189 Frederiksen, Mette, 214* Friedman, Milton, 15, 69–70, 71, 76 The Full Monty (film), 7, 129 G20 group, 118 G7 group, 118 G8 group, 194 Ganesh, Janan, 125 Geldof, Bob, 169 General Agreement on Tariffs and Trade (GATT), 114, 115, 116–17 General Motors (GM), 72, 73–4, 75, 86, 172 geographic divide, 3, 16, 18, 19, 215 author’s proposed policies, 19, 207 and Brexit vote, 125, 196 broken cities, 4, 7, 19, 48, 125, 129–30, 147–9 business zones, 150 co-ordination problem over new clusters, 145–50, 207 decline of provincial cities, 4, 7, 19, 48, 125, 129–30, 131, 144–5 economic forces driving, 126–30 and education spending, 167 first mover disadvantage, 148–9 ideological responses, 130–32 investment promotion agencies, 150–51 and local universities, 151–2 and metropolitan disdain, 125 need for political commitment, 153 as recent and reversible, 152–3 regenerating provincial cities, 19, 142, 144–50 and spending per school pupil, 167 widening of since 1980, 125 George, Henry, 133–6, 141 Germany 2017 election, 5, 205 local banks in, 146 Nazi era, 57 and oppositional identities, 56–7 oversight of firms in, 76 post-war industrial relations policy, 94–5 and post-war settlement, 114 re-emergence of far right, 5 rights of refugees in, 14 ‘social market economy’, 49 TVET in, 171–2, 174, 175 vereine (civil society groups), 181 worker interests on boards, 84–5 global divide, 7–8, 20, 59–60, 191–8, 208 globalization, 4, 18, 20, 126–7, 128, 129, 130–31, 191–8 Goldman Sachs, 70†, 83–4, 94 Google, 87 Great Depression (1930s), 114 Green, Sir Philip, 80 Grillo, Beppe, 202 ‘Grimm and Co’, Rotherham, 168–9 Gunning, Jan Willem, 165 Haidt, Jonathan, 11–12, 14, 16, 28, 29, 132–3 Haiti, 208 Halifax Building Society, 8, 84 Hamon, Benoît, 9, 204 Harvard-MIT, 7, 152 Hershey, 77 HIV sufferers in poor countries, 120–21 Hofer, Norbert, 202 Hollande, Francois, 9, 204 Hoover, 148 housing market, 181–4 buy-to-let, 182, 183, 184 and lawyers, 187 mortgages, 84, 176, 182, 183–4 proposed stock transfer from landlords to tenants, 184 Hume, David, 14, 21, 21–2†, 29 Huxley, Aldous, Brave New World (1932), 5 Iceland, 63 Identity Economics, 50–56, 65–7 ideologies based on hatred of ‘other’ part of society, 43, 56, 213, 214 ‘end of history’ triumphalism, 6, 43–4 hostile to families, 36–7 hostile to firms, 37, 81 hostile to the state, 37–8 and housing policy, 183 and migration, 198 New Right, 14–15, 26, 81, 129 norms of care and equality, 116, 132–3 polarization of politics, 38, 63, 202–5 pragmatic eschewal of, 17, 18, 21, 22, 29–30 and principle of reason, 9, 13, 14, 15, 21, 43 Rawlsian vanguard, 13–14, 30, 49–50, 53, 67, 112, 113, 201, 202, 203, 214 return of left-right confrontation, 5, 6, 81, 202–5 and rights, 12–14, 44, 112 seduction of, 6 and twentieth century’s catastrophes, 5–6, 22 views on an ethical world, 112 see also Marxism; rights ideology; Utilitarianism IFC (International Finance Corporation), 122 Imperial Chemical Industries (ICI), 69–70, 75 India, 118–19 individualism entitled individual vs family obligation, 99–103, 104–6, 108–9, 210 fulfilment through personal achievement, 28, 99, 100–101, 102, 103, 108–9, 213 New Right embrace of, 14–15, 53, 81, 214–15 as rampant in recent decades, 19, 214–15 reciprocity contrasted with, 44–5 and withering of spatial community, 61–2 industrial revolution, 8, 126 inequality and assortative mating among new elite, 99–100, 154, 188–9 and divergence dynamic, 7, 18, 48, 98–108, 154–61, 170–71, 172–80, 181–90 and financial sector, 185 and geographic divide, 3, 7–8, 20, 125 global divide, 7–8, 20, 59–60, 191–8, 208 persistence of, 106–8 Rawls’ disadvantaged groups, 3–4, 13–14, 16, 50, 53, 121, 203–4, 214 and revolt against social democracy, 15–16 rising levels of, 3–5, 106, 125, 181, 190 and Utilitarian calculus, 132 innovation, 185–6, 208 International Monetary Fund (IMF), 114, 117 international relations achievement of post-WW2 leaders, 113–16, 122 building of shared identity, 114–16 core concepts of ethical world, 112, 113–14 erosion of ethical world, 116–18 expansion of post-war ‘clubs’, 116–18, 210 new, multipurpose club needed, 118–19, 122 and patriotism narrative, 67 situation in 1945, 112–13, 122 investment promotion agencies, 150–51 Irish Investment Authority, 151 Islamist terrorism, 42, 212, 213 Italy, 4, 58, 160 James, William, 29* Janesville (US study), 178 Japan, 72–3, 94, 101, 149, 192 John Lewis Partnership, 83, 172 Johnson, Robert Wood, 39–40, 72 Johnson & Johnson, 39–40, 41, 72, 74*, 79 Jolie, Angelina, 112 JP Morgan, 71* Juppé, Alain, 204 Kagame, Paul, 22 Kay, John, 82*, 84, 211 Keynes, John Maynard, 115 General Theory (1936), 47 kindergartens, 163 Knausgård, Karl Ove, 173 knowledge revolution, 126, 127–8 Kranton, Rachel, 35, 50–51 Krueger, Anne, 141 Krugman, Paul, 47 labour market flexicurity concept, 178 function of, 176–7 and globalization, 192, 194–6 and immigration, 194, 195, 196 investment in skills, 176–7 job security, 176, 177 and low productivity-low cost business model, 173–4 minimum wage strategies, 147, 174, 176, 180 need for reductions in working hours, 189 need for renewed purpose in work, 190 regulation of, 174, 189 and robotics revolution, 178–9 role of state, 177–8, 189 see also unemployment Labour Party, 49, 206 Marxist take-over of, 9, 204–5 language, 31, 32, 33, 39–40, 54, 57 Larkin, Philip, 99, 156 lawyers, 13–14, 45 Buiter’s three types, 186 and shell companies, 193, 194 surfeit of, 186–7 taxation of private litigation proposal, 187–8 Le Pen, Marine, 5, 63, 125, 202, 204 leadership and belief systems, 41–2, 43, 95 building of shared identity, 39–42, 49, 68, 114–16 changing role of, 39 and flattening of hierarchies, 39 and ISIS, 42 political achievements in post-war period, 113–16, 122 and pragmatist philosophy, 22 and shared purpose in firms, 39–40, 41, 71–5 strategic use of morality, 39–40, 41 transformation of power into authority, 39, 41–2, 57 League of Nations, 116 Lee Kwan Yew, 22, 147 Lehman Brothers, 71*, 76 liberalism, 30 libertarianism, 12–13, 15 New Right failures, 16, 21 Silicon Valley, 37–8 lobbying, 85, 141 local government, 182, 183 London, 3, 125, 127–8, 165–6, 193 impact of Brexit on, 131, 196 migration to, 195–6 Macron, Emmanuel, 67, 204 Manchester terror attack (2017), 212, 213 market economy, 19, 20, 21, 25, 48 and collapse of clusters, 129–30, 144–5 failure over pensions, 180 failure over skill-formation, 173–4 mutual benefit from exchange, 28 market fundamentalists, 147, 150 marriage assortative mating, 35, 99–100, 154, 188–9 cohabitation prior to, 99, 100 as ‘commitment technology’, 109, 155–6 divorce rates, 98, 99, 100–101, 102, 103 and female oppression, 156 religious associations, 109, 156 and rent-seeking, 141 ‘shotgun weddings’, 103 and unemployment, 103 Marxism, 13*, 26, 30, 43, 47, 113, 203, 214 alienation concept, 17–18 and the family, 36–7 late capitalism concept, 6 takeover of Labour Party, 9, 204–5 and ‘useful idiots’, 205* view of the state, 37 Maxwell, Robert, 80 May, Theresa, 205 Mayer, Colin, 18, 70 media celebrities, 6, 112, 204 Mélenchon, Jean-Luc, 5, 202, 204 mental health, 157, 158–9, 162 Mercier, Hugo, 29 meritocratic elites, 3–4, 5, 12–17, 20 Rawlsian vanguard, 13–14, 30, 49–50, 53, 67, 112, 113, 201, 202, 203, 214 Utilitarian vanguard, 9–10, 11–13, 15–16, 18, 52, 53, 59, 66–7, 209 see also Utilitarianism WEIRD (Western, Educated, Industrial, Rich and Developed), 3–4, 12, 14, 16, 17, 20, 116, 121, 133, 214* and white working class, 5, 16 Merkel, Angela, 14, 205 metropolitan areas, 3, 4, 7, 16, 19, 48, 125 co-ordination problem over new clusters, 145–50, 207 economies of agglomeration, 18, 19, 129, 131, 133–44, 195, 196, 207 gains from public goods, 134–5, 138–9 migration to, 195–6 political responses to dominance of, 131–2 scale and specialization in, 126–8, 130, 144–5 and taxation, 131, 132–43, 187, 207 Middle East, 192 Middleton, Kate, 188–9 migration, 121, 194–8, 203 as driven by absolute advantage, 20, 194–5, 208–9 and housing market, 182, 183 Mill, John Stuart, 9–10 minimum wage strategies, 147, 174, 176, 180 Mitchell, Andrew, 188 Mitchell, Edson, 78 modernist architecture, 12 Monarch Airlines, 75 monopolies, natural, 86–7, 88 and asymmetric information, 88, 90 auctioning of rights, 88–9 taxation of, 91–2 utility services, 86, 89, 90 ‘moral hazard’, 179 morality and ethics deriving from values not reason, 27, 28–9, 42–3 and economic man, 10, 19, 25, 26–7, 31, 34–5 and empathy, 12, 27 evolution of ethical norms, 35–6 Haidt’s fundamental values, 11–12, 14, 16, 29, 42–3, 132–3 and market economy, 21, 25, 28, 48 and modern capitalism, 25–6 and new elites, 3–4, 20–21 Adam Smith’s theories, 26–8 use for strategic purposes, 39–40, 41 and Utilitarianism, 9–10, 11, 14, 16, 55, 66–7, 209, 214 motivated reasoning, 28–9, 36, 86, 144, 150, 167 Museveni, President, 121 narratives and childhood mentors, 169–70 and consistency, 41, 67, 81, 96 conveyed by language, 31, 33, 57 detachment from place by e-networks, 38, 61–2 and heyday of social democracy, 49 and identity formation, 32 mis-ranking of cognitive and non-cognitive training, 174–6 moral norms generated from, 33, 97–8 and purposive action, 33–4, 40–41, 42, 68 and schools, 165 of shared identity, 53–6, 81 use of by leaders, 39–42, 43, 49, 80–81 see also belonging, narrative of; obligation, narrative of; purposive action National Health Service (NHS), 49, 159 national identity and citizens-of-the-world agenda, 59–61, 63, 65 contempt of the educated for, 53, 59, 60–61, 63 and distinctive common culture, 37†, 63 established in childhood, 32 esteem from, 51–3 fracture to skill-based identities, 3–5, 51–6, 78 legacy of Second World War, 15, 16 methods of rebuilding, 64, 65–8, 211–15 and new nationalists, 62–3, 67, 203, 204, 205 patriotism narrative, 21, 63, 67, 215 place-based identity, 51–6, 65–8, 211–14, 215 and polarization of society, 54–5 and secession movements, 58 unravelling of shared identity, 15, 50, 51–6, 57*, 58–61, 63, 215 and value identity, 64–5 National Review, 16 nationalism, 34 based on ethnicity or religion, 62–3 capture of national identity notion by, 62, 67, 215 and narratives of hatred, 56, 57, 58–9 and oppositional identities, 56–7, 58–9, 62–3, 68, 215 traditional form of, 62 natural rights concept, 12, 13 Nestlé, 70, 71 Netherlands, 206 networked groups as arena for exchanging obligations, 28 and ‘common knowledge’, 32–3, 34, 54, 55, 66, 212 decline of civil society networks/ groups, 180–81 and early man, 31 evolution of ethical norms, 35–6 exclusion of disruptive narratives, 34 families as, 97–8 leadership’s use of narratives, 39–42, 49 narratives detached from place, 38, 61–2 value-based echo-chambers, 38, 61–2, 64–5, 212, 215 see also family; firms Neustadt, Richard, 39* New York City, 5, 125, 128, 143–4, 193 NGOs, 71, 118, 157–8 ‘niche construction’, 35*, 36* Nigeria, 58 Noble, Diana, 149* Norman, Jesse, 21–2† North Atlantic Treaty Organization (NATO), 114, 115, 116, 117 North Korea, 85 Northern League, Italy, 58 Norway, 63, 206, 208–9 Nozick, Robert, 14–15 obligation, narrative of, 11, 12–13, 16, 19, 29, 33 and collapse of social democracy, 53–6, 210 entitled individual vs family obligation, 99–103, 104–6, 108–9, 210 in ethical world, 112, 113–22 and expansion of post-war ‘clubs’, 117–18, 210 fairness and loyalty instilled by, 34 heyday of the ethical state, 48–9, 68, 196–7 and immigration, 196–7 and leadership, 39, 40–41, 49 ‘oughts’ and ‘wants’, 27, 28, 33, 43 and secession movements, 58 and Adam Smith, 27, 28 see also reciprocity; rescue, duty of oil industry, 192 Organization for Economic Co-operation and Development (OECD), 114–15, 125 Orwell, George, Nineteen Eighty-Four (1949), 5 Oxford university, 7, 70, 100 Paris, 5, 7, 125, 128, 174, 179 patriotism, 21, 63, 67, 215 Pause (NGO), 157–8 pension funds, 76–7, 79–81, 179–80, 185 Pew Research Center, 169 Pinker, Steven, 12* Plato, The Republic, 9, 11, 12, 15, 43 Playboy magazine, 99 political power and holders of economic rent, 135–6, 144 leadership selection systems in UK, 204–5, 206 minimum age for voting, 203 need to restore the centre, 205–7 polarization within polities, 38, 63, 202–5 polities as spatial, 38, 61–2, 65, 68, 211–13 and shared identity, 8, 57–61, 65, 114–16, 211–15 transformation into authority, 41–2, 57–8 trust in government, 4, 5, 48, 59, 210, 211–12 populism, political, 6, 22, 43, 58–9, 202 and geographic divide, 130–31 headless-heart, 30, 60, 112, 119, 121, 122 media celebrities, 6, 112, 204 pragmatism as opposed to, 30 and US presidential election (2016), 5, 203–4 pragmatist philosophy, 6, 9, 19, 21, 21–2†, 46, 201 author’s proposed policies, 19–20, 21, 207–15 limitations of, 30 and Macron in France, 204 and migration, 198 and post-war settlement, 113, 116, 122 and social democracy, 18, 201–2 successful leaders, 22 and taxation, 132, 207 and teaching methods, 166–7 values and reason, 29–30, 43–4 proportional representation, 206 protectionism, 113, 114, 130–31 psychology, social, 16, 54 co-ordination problems, 32–3 esteem’s trumping of money, 174 Haidt’s fundamental values, 11–12, 14, 16, 29, 42–3, 132–3 narratives, 31, 32, 33–4, 38, 39–42, 49, 53–6 norms, 33, 35–6, 39, 42–3, 44, 97–8, 107–8 ‘oughts’ and ‘wants’, 27, 28, 33, 43 personal achievement vs family obligation, 99–103, 104–6, 108–9, 210 ‘theory of mind’, 27, 55 Public Choice Theory, 15–16 public goods, 134–5, 138–9, 186, 202, 213 public ownership, 90 Puigdemont, Carles, 202 purposive action, 18, 21, 25, 26, 34, 40*, 53–4, 68, 112, 211–13 autonomy and responsibility, 38–9 and belonging narrative, 68, 98, 114, 211, 212, 213 in Bhutan, 37† decline in ethical purpose across society, 48 and heyday of social democracy, 47, 49, 114 and narratives, 33–4, 40–41, 42, 68 in workplace, 190 Putnam, Robert, 45–6, 106 Bowling Alone, 181 ‘quality circles’, 72–3 Rajan, Raghuram, 178 Rand, Ayn, 32 rational social woman, 31, 50–51, 196 Rawls, John, 13–14 Reagan, Ronald, 15, 26 Reback, Gary, 90 reciprocity, 9, 19, 31, 212–15 and belonging, 25, 40–41, 49, 53–6, 67, 68, 98, 181, 182, 210–11, 212–13 and collapse of social democracy, 11, 14, 53–6, 58–61, 201, 210 and corporate behaviour, 95 in ethical world, 112, 113–15, 116 and expansion of post-war ‘clubs’, 117–18, 210 fairness and loyalty as supporting, 29, 31, 34 and the family, 97–8, 101, 102 and geographic divide, 125 heyday of the ethical state, 48–9, 68, 96, 196–7, 201 and ISIS, 42 Macron’s patriotism narrative, 67 nineteenth-century co-operatives, 8 rights matched to obligations, 44–5 and three types of narrative, 33, 34, 40–41 transformation of power into authority, 39, 41–2, 57–8 Refuge (Betts and Collier), 27 refugees, 14, 27, 115, 119–20, 213 regulation, 87–90 and globalization, 193–4 of labour market, 174 religion, 56–7, 62–3, 109, 156 religious fundamentalism, 6, 30, 36–7, 212, 213, 215 rent-seeking concept, 140–41, 150, 186, 187–8, 195 rescue, duty of, 40, 54, 119–21, 210, 213 as instrument for ethical imperialism, 117–18, 210 as not matched by rights, 44, 45, 117 and post-war settlement, 113, 115–16 restoring and augmenting autonomy, 121–2 and stressed young families, 163 term defined, 27, 112 value of care as underpinning, 29 retirement pensions, 179–80 rights ideology and corresponding obligations, 44–5 emergence in 1970s, 12–14 human rights lobby, 112, 118, 118* individualism as rampant in recent decades, 19, 214–15 and lawyers, 13–14, 45 Libertarian use of, 12–13, 14–15 natural rights concept, 12, 13 and New Right, 12–13, 14–15, 53 Rawls’ disadvantaged groups, 3–4, 13–14, 16, 50, 53, 112, 121, 203–4, 214 ‘rights of the child’ concept, 103–4 and Utilitarian atate, 12–14 see also individualism Romania, communist, 32, 36 Rotherham, ‘Grimm and Co’, 168–9 rule of law, 138–9, 186 Rwanda, 22 Salmond, Alex, 202 Sandel, Michael, 105 Sanders, Bernie, 9, 64, 202, 203 Sarkozy, Nicolas, 204 Schultz, Martin, 14 Schumpeter, Joseph, 21* Scotland, 58 Seligman, Martin, 108–9 sexual behaviour birth-control pill, 98–9, 102 and class divide, 99, 102, 155–6 concept of sin, 156 and HIV, 121 and stigma, 156–8 sexual orientation, 3, 45 Sheffield, 7, 8, 126, 128–9, 131, 151, 168, 192 shell companies, 193, 194 Shiller, Robert, 34 Sidgwick, Henry, 55 Signalling, Theory of, 41, 43, 53, 63, 95 Silicon Valley, 37–8, 62, 145, 152, 164 Singapore, 22, 147 Slovenia, 58 Smith, Adam, 14, 21, 21–2†, 174 and mutual benefit from exchange, 28 and pursuit of self- interest, 26–7, 40 on reason, 29 The Theory of Moral Sentiments (1759), 27, 28, 174 Wealth of Nations (1776), 26, 28, 174 Smith, Vernon, 28 social democracy ‘Butskellism’, 49* collapse of, 9, 11, 50, 51–6, 116–18, 201–2, 210 communitarian roots, 8–9, 11, 13, 14, 17, 48–9, 201 and group identities, 3–4, 13–14, 51–6 heyday of, 8–9, 15, 17, 47, 48–9, 68, 96, 196–7, 201, 210 and housing, 181–2 influence of Utilitarianism, 9, 10, 14, 16, 18, 49–50, 201, 203, 214 Libertarian challenge, 12–13, 14–15 New Right abandonment of, 14–15, 16, 26, 53 and Public Choice Theory, 15–16 replaced by social paternalism, 11–13, 49–50, 209–10 and rights ideology, 12–14 and secession movements, 58 shared identity harnessed by, 15, 196–7 unravelling of shared identity, 15, 50, 51–6, 57*, 58–61, 63, 215 and Utilitarianism, 214 social maternalism concept, 21, 154–5, 190 free pre-school education, 163–4 mentoring for children, 169–70, 208 support for stressed families, 20, 155, 157–60, 161–3, 208 social media, 27, 61, 87, 173, 207, 215 social paternalism backlash against, 11–13, 15–16 as cavalier about globalization, 20 and child-rearing/family, 105, 110, 154–5, 157, 158, 159, 160, 190, 209 replaces social democracy, 11–13, 49–50, 209–10 ‘rights of the child’ concept, 103–4 and Utilitarian vanguard, 9–10, 11–13, 15–16, 18, 66–7, 209 social services, 159 scrutiny role, 162 Solow, Robert, 141 Soros, George, 15* South Africa, 85 South Asia, 192 South Korea, 129, 130–31 South Sudan, 192 Soviet Union, 114, 115, 116, 203 Spain, 58, 160 specialization, 17–18, 36, 126–8, 130, 144–5, 192 Spence, Michael, 41, 53, 95 Sperber, Dan, 29 St Andrews University, 189 Stanford University, 145, 152 Starbucks, 193 the state, 19 ethical capacities of, 11, 20–21, 48–9 failures in 1930s, 47, 48 ideologies hostile to, 37–8 and pre-school education, 163–4 and prosperity, 37 public policy and job shocks, 177–8 public policy on the family, 21, 154–5, 157–70, 171–3, 177, 209 public-sector and co-ordination problem, 147–8 social maternalism policies, 21, 157, 190 Utilitarian takeover of public policy, 10–12, 13–14, 15–17, 18, 49–50, 113, 201 Stiglitz, Joseph, 56 Stoke-on-Trent, 129 Stonehenge, 64 Sudan, 8 Summers, Larry, 187 Sure Start programme, 164 Sutton, John, 151* Sweden, 178 Switzerland, 175, 206 Tanzania, 193 taxation and corporate globalization, 193, 194 of economic rents, 91–2, 187–8 ethics and efficiency, 132–43 on financial transactions, 187 generational differences in attitudes, 59 Henry George’s Theorem, 133–6, 141 heyday of the ethical state, 49 issues of desert, 132–3, 134–9 and the metropolis, 131, 132–43, 187, 207 and migration, 197 of natural monopolies, 91–2 ‘optimal’, 10 of private litigation in courts, 187–8 and reciprocity, 54, 55, 59 redesign of needed, 19 redistributive, 10, 11, 14, 49, 54, 55, 60, 197 of rents of agglomeration, 19, 132–44, 207 social maternalism policies, 21, 157 substantial decline in top rates, 55 tax havens, 62 Venables-Collier theory, 136–9 Teach First programme, 165–6 technical vocational education and training (TVET), 171–6 technological change, 4 robotics revolution, 178–9 and withering of spatial community, 61–2 see also digital networks telomeres, 155–6 Tepperman, Jonathan, The Fix, 22 Thatcher, Margaret, 15, 26 Thirty Years War, 56–7 Tirole, Jean, 177, 178 Toyota, 72–3, 74, 94, 172 trade unions, 173, 174, 176 Troubled Families Programme (TFP), 162 Trudeau, Pierre, 22 Trump, Donald, 5, 9, 63, 64, 86, 125, 136, 202, 204, 206, 215 Uber, 87 unemployment in 1930s, 47 and collapse of industry, 7, 103, 129, 192 impact on children, 160–61 older workers, 4, 103, 213 retraining schemes, 178 in USA, 160 young people, 4 Unilever, 70, 71 United Kingdom collapse of heavy industry, 7, 103, 129, 192 extreme politics in, 5 and falling life expectancy, 4 financial sector, 80, 83, 84–5 IMF bail-out (1976), 115 local banks in past, 146 northern England, 3, 7, 8, 84, 126, 128–9, 131, 151, 168, 192 shareholder control of firms, 76–7, 79, 80, 82–3 statistics on firms in, 37 universities in, 170, 172, 175* vocational education in, 172, 175† widening of geographic divide, 125 United Nations, 65, 112 ‘Club of 77’, 116 Security Council, 116 UNHCR, 115 United States breakdown of ethical family, 104–5 broken cities in, 129, 130 extreme politics in, 5, 63 and falling life expectancy, 4 financial sector, 83–4, 186 and global e-utilities, 89–90 growth in inequality since 1980, 125 heyday of the ethical state, 49 and knowledge industries, 192 labour market in, 176, 178 local banks in past, 146 oversight of firms in, 76 pessimism in, 5, 45–6 presidential election (2016), 5, 9, 203–4 Public Interest Companies, 93 public policy as predominantly national, 212 ‘rights of the child’ concept in, 103–4 Roosevelt’s New Deal, 47 statistics on firms in, 37 taxation in, 143–4, 144* unemployment in, 160 universities in, 170, 172, 173 weakening of NATO commitment, 117 universities in broken cities, 151–2 in EU countries, 170 expansion of, 99–100, 127 knowledge clusters at, 127, 151–2 low quality vocational courses, 172–3 in UK, 170, 172, 175* in US, 170, 172, 173 urban planning, post-war, 11–12 Utilitarianism, 19, 30, 49–50, 55, 108, 112, 121, 210–11 backlash against, 11–13, 201, 202 belonging as absent from discourse, 16, 59, 66–7, 210–11 care as key value, 12 and consumption, 10, 11, 16, 19–20, 209 equality as key value, 12, 13, 14, 15, 116, 132–3, 214 incorporated into economics, 10–11, 13–14, 16 influence on social democrats, 9, 10, 14, 16, 18, 49–50, 201, 203, 214 origins of, 9–10 paternalistic guardians, 9–10, 11–13, 66–7, 210 takeover of public policy, 10–12, 13–14, 15–17, 18, 49–50, 113, 201 and taxation, 10, 132*, 133 vanguard’s switch of identity salience, 52, 53, 59 Valls, Manuel, 204 Venables, Tony, 18, 136, 191* Venezuela, 120, 214 vested interests, 85–6, 135–6, 165, 166, 207 Volkswagen, 74–5 Walmart, 87 Warsi, Baroness Sayeeda, 65 Wedgwood, Josiah, 129 welfare state, 9, 48–9 unlinked from contributions, 14 well-being and happiness belonging and esteem, 16, 25, 27, 29, 31–3, 34, 42, 51–6, 97–8, 174 entitled individual vs family obligation, 108–9 and financial success, 26, 94 ‘ladder of life’, 25* poverty in Africa, 37 reciprocity as decisive for, 31 Westminster, Duke of, 136 white working class ‘elite’ attitudes to, 4, 5, 16 falling life expectancy, 4, 16 pessimism of, 5 William, Prince, 188–9 Williams, Bernard, 55* Wittgenstein, 62, 63 Wolf, Alison, 52–3, 155 World Bank, 115, 117, 118, 118*, 122 World Food Programme, 115 World Health Organization, 115 World Trade Organization (WTO), 116–17 Yugoslavia, 58 Zingales, Luigi, 178 Zuma, Jacob, 85 Copyright THE FUTURE OF CAPITALISM.


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

activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, buy and hold, Carl Icahn, centralized clearinghouse, clean water, compensation consultant, computerized trading, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Glass-Steagall Act, income inequality, index fund, information asymmetry, invisible hand, John Bogle, Kenneth Arrow, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, Paul Volcker talking about ATMs, payment for order flow, performance metric, Ponzi scheme, post-work, principal–agent problem, rent-seeking, Ronald Coase, seminal paper, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

This creates a danger that prudent profit-seeking can morph into imprudent risk-taking. If every thing goes well, the executives reap the rewards, but if it doesn’t, the troubles are laid at the feet of the public taxpayers. Academics and bank regulators call this situation “moral hazard,” but at its heart, it is the same “Heads we win, tails you lose” philosophy that we all recognize as grossly unfair. The inherent nature of banks makes moral hazard more than an academic concern. The International Finance Corporation (IFC, the private sector arm of the World Bank) explains in its training guide for bank directors that the very business model of banks makes them inherently fragile.32 Growth, for banks, is a tricky proposition.

See also Economic modeling Max Planck Institute for Research on Collective Goods, 215 McRitchie, James, 116–17 Mercer, 122 Merrill Lynch, 44 Merton, Robert, 260n20 MFS Technologies, 82 Microeconomics, 179, 181–82 Millstein Center for Corporate Governance and Performance, 265n13 Millstein, Ira, 8 Minow, Nell, 207 Mirvis, Theodore, 8 Misalignment indicators, 104 Molinari, Claire, 112 Money managers, using collective action to allow focus on benefits for all, 89–90 “The Monkey Business Illusion” (video), 174 Monks, Bob, 62 Moral hazard, 73 Morality: economics and, 158 trade, 177 Morningstar, 34, 35, 36–37, 101, 122, 208, 225 Mortgages: chain of agents involved in, 31–32 subprime, 38, 40, 47 Murninghan, Marcy, 122 Mutual funds: agency capitalism and, 77–78 boards of, 205–6, 265n14 chain of agents in, 31 disclosure rules, 97 duration of holdings, 243n4, 258n41 failure to protect investors’ interests, 6–7 governance and performance of, 101–4, 224–25 grassroots campaigns influencing, 117 self-evaluation of, 110 votes on shareholder resolutions, 102 Mylan Laboratories, 81 Myopia, 66, 68 National Employment Savings Trust (NEST), 111, 206, 208 National governance code, 205, 265n13 Navalny, Alexei, 115–16 NEST.


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Stolen: How to Save the World From Financialisation by Grace Blakeley

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Big Tech, bitcoin, bond market vigilante , Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, capitalist realism, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, democratizing finance, Donald Trump, emotional labour, eurozone crisis, Extinction Rebellion, extractivism, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, green new deal, Greenspan put, housing crisis, Hyman Minsky, impact investing, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Jeremy Corbyn, job polarisation, junk bonds, Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low interest rates, low skilled workers, market clearing, means of production, Modern Monetary Theory, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Phillips curve, Ponzi scheme, Post-Keynesian economics, post-war consensus, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, Robert Solow, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

This meant implementing the logic of Keynesianism — that states should borrow to invest to mute the ups and downs of the business cycle — whilst skimming some cash off the top for the private sector. In other words, state-sponsored rentierism. State-guaranteed private borrowing creates the problem of moral hazard, a situation in which economic actors are shielded from the negative consequences of their actions. Before 2007, the banks knew that if they ran into trouble the government would always be there to bail them out — they could take huge risks today, without having to face the consequences tomorrow. This problem of moral hazard is what underlay the collapse of PFI giant Carillion.24 The firm was accepting government contracts at very low prices — less than the amount they needed to deliver the work — and eventually found itself unable to deliver its contracts and pay its shareholders.

., Inham, G. (1984) Capitalism Divided: The City and Industry in British Social Development, London: Macmillan 37 This account draws on: Lapavitsas (2013); Hilferding, R. (1919) Finance Capital: A Study of the Latest Phase of Capitalist Development; Panitch and Gindin (2012); Pettifor (2017) 38 This account draws on: Epstein and Jayadev (2005); Epstein (2009); Miller, M., Weller, P. and Zhang, L. (2001) “Moral Hazard and the US Stock Market: Analysing the ‘Greenspan Put’”, Centre for the Study of Globalisation and Regionalisation Working Paper 83/01. https://warwick.ac.uk/fac/soc/pais/research/researchcentres/csgr/papers/workingpapers/2001/wp8301.pdf 39 This analysis draws on: Englen, E., Erturk, I., Froud, J., Johal, S., Leaver, A., Moran, M. and Williams, K. (2012) “Misrule of Experts?


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Giving the Devil His Due: Reflections of a Scientific Humanist by Michael Shermer

Alfred Russel Wallace, anthropic principle, anti-communist, anti-fragile, barriers to entry, Berlin Wall, Black Lives Matter, Boycotts of Israel, Chelsea Manning, clean water, clockwork universe, cognitive dissonance, Colonization of Mars, Columbine, cosmological constant, cosmological principle, creative destruction, dark matter, deplatforming, Donald Trump, Edward Snowden, Elon Musk, fake news, Flynn Effect, germ theory of disease, Great Leap Forward, gun show loophole, Hans Rosling, heat death of the universe, hedonic treadmill, helicopter parent, Higgs boson, hindsight bias, illegal immigration, income inequality, intentional community, invisible hand, Johannes Kepler, Joseph Schumpeter, Kim Stanley Robinson, laissez-faire capitalism, Laplace demon, luminiferous ether, Mars Society, McMansion, means of production, mega-rich, Menlo Park, microaggression, military-industrial complex, moral hazard, moral panic, More Guns, Less Crime, Multics, Oklahoma City bombing, Peter Singer: altruism, phenotype, positional goods, power law, public intellectual, race to the bottom, Richard Feynman, Ronald Coase, Silicon Valley, Skype, social intelligence, Social Justice Warrior, stem cell, Stephen Hawking, Steve Jobs, Steven Pinker, Suez crisis 1956, TED Talk, the scientific method, The Wealth of Nations by Adam Smith, Timothy McVeigh, transaction costs, WikiLeaks, working poor, Yogi Berra

The Hidden Costs of Market Failures and Moral Hazards Moving from examples to analysis, Frank employs a technical model developed by the economist Ronald Coase that shows precisely how economists can take into account such transaction costs in order to better understand macroeconomic phenomena and correct for market failures. Here Frank claims that the transaction costs of keeping up with the Joneses are not presently included in the price of homes, suits, shoes, and parties in terms of the real benefit to the owners, so this is an example of a market failure (and, he opines, a moral hazard) that he suggests can be remedied through a progressive consumption tax wherein these newfound liabilities would not only adjust the transaction costs to account for the hedonic treadmill while simultaneously curtailing needless consumptive behavior, it would also generate additional tax revenues from the rich that could be used to shore up our crumbling Social Security and Medicare accounts.

McNally sites an analysis by the Institute of Medicine, which found that “exposure therapy is the most efficacious treatment for PTSD, especially in civilians who have suffered trauma such as sexual assault.”6 In other words, face your problems head-on and deal with them. An additional problem with trigger warnings is that the number of triggers has expanded to the point where nearly every speech and lecture could contain triggering words, turning communication into a moral hazard. Finally, who determines what is “triggering” anyway? The very concept is a recipe for censorship. Safe Spaces According to the organization Advocates for Youth, a safe space is “A place where anyone can relax and be fully self-expressed, without fear of being made to feel uncomfortable, unwelcome or challenged on account of biological sex, race/ethnicity, sexual orientation, gender identity or expression, cultural background, age, or physical or mental ability; a place where the rules guard each person’s self-respect, dignity and feelings and strongly encourage everyone to respect others.”7 Some such places even contain pillows, soothing music, milk and cookies, and videos of puppies.

Arkansas, 52 Erasmus, 225 eSkeptic, 81 Espionage Act (1917), 2 European Union founding of, 249–250 evil myth of pure evil, 28–37 nature of, 28–37 evolution argument for decentralising authority, 215–217 case for bottom-up self-organization, 215–217 development of Darwin’s theory, 44–46 impact of the Darwinian revolution, 44–47 religious-based skepticism, 47–50 support for creationism in America, 46 why people do not support it, 47–50 evolution–creationism controversy, 44–54 Evolutionary Creationists, 51 evolutionary economics collective action problem, 198–201 Darwin economy, 199–201 hidden costs of market failures and moral hazards, 201–202 importance of positional rank, 200–201 role of ostentatious display, 200–201 “sin taxes”, 201–202 taxation, 203 top-down government, 199–201 transaction costs of keeping up with the Joneses, 201–202 See also evonomics evonomics advantages gained from ostentatious display, 207–210 argument for wealth redistribution, 210–213 bottom-up self-organization, 203–205 connection between Adam Smith and Charles Darwin, 203–205 corporations as species, 205–207 creative destruction concept, 206 fatal conceit of top-down government, 215–217 positional ranking, 210–213 relative happiness, 210–213 what is seen and not seen in government actions, 213–215 Expanding Circle theory, 240 expanding sphere of knowledge metaphor, 125 externalities, 199 extraterrestrial intelligence, 221 Fawcett, Henry, 45–46 Feder, Ken, 324–325 feminism victimhood culture, 73 Ferris, Timothy, 228 Festinger, Leon, 95 Feynman, Richard, 123, 316 First World War, 1, 16 Fisher, Helen, 158 flat-Earthers, 51 Flynn, James, 19, 23, 24–25 Flynn Effect, 25 Forbes, Bertie, 206 Ford, Henry, 31 Foundation for Individual Rights in Education (FIRE), 25, 70 Foundation for the Future, 289 14/88 code, 30–31 Fox, James Alan, 169, 175 Fox News, 181 fragile children, 74 Frank, Robert H., 198, 199–202, 203, 204, 208–213, 215–217 Franklin, Benjamin, 84, 226 Frankowski, Nathan, 55 Freakonomics theory, 174 free trade institutions, 249–251 free will–determinism debate, 264–265 freedom of inquiry, 8, 19–27search for truth in science, 26–27 freedom of speech, 19–27campus unrest over controversial speakers, 64–78 college speaker disinvitations, 70–71 democracy and, 26 evolution–creationism controversy, 44–54 Free Speech Movement of the late 1960s, 64–65 giving the devil his due, 1–9 hate speech, 13–16, 28–37 Holocaust denial, 38–43 increasing viewpoint diversity in colleges, 76–78 Intelligent Design conspiracy theory, 55–63 Jordan Peterson on gender pronouns and Bill C-16, 300–303 microaggressions, 68–70 Ten Commandments of free speech and thought, 7–8 trigger warnings, 66–67 French Revolution, 72 Fuji film, 206 Gacy, John Wayne, 35 Gap Creationists, 51 Gardner, Martin, 270, 271, 319 Geivett, Douglas, 104 Geller, Uri, 271, 272 gender differences research on, 22–23 gender pronouns Jordan Peterson on, 300–303 General Electric (GE), 206 General Motors (GM), 206 Generation X, 65 Generation Z how they handle challenges, 64–65 Geocentrists, 51 Geoffroy, Gregory, 60 George, Robby, 83 Ghawi, Jessica, 176 Gibbon, Edward, 204 Giffords, Gabrielle, 175 Gingrich, Newt, 82, 83 Gish, Duane, 280 Göbekli Tepe stone structures, 324–326 God and the purpose of the universe, 103–108 creation of the universe ex nihilo (out of nothing), 115–117 ontological argument for the existence of, 114 Goldberg, Jeffrey, 279–280 Goldberg, Jonah, 131 Goldhagen, Daniel, 61 Goldman, Emma, 2 Goldwater, Barry, 77 Gonzales, Guillermo, 59–60 Google, 206, 260 Gore, Al, 137 Gould, John, 44 Gould, Stephen Jay, 292, 294 governance experiments artificial communities, 154 HMS Bounty mutineers on Pitcairn Island, 156–159 intentional communities, 154 shipwrecked groups, 155–156 social experiments, 154–156 unintentional communities, 154–156 governance systems avoiding weak government, 153–154 challenges for, 147–148 delegative democracy, 149 designing extraterrestrial systems, 150–152 direct democracy, 149–150 features of good societies, 154–155 impact of cyber-technology, 153 in science fiction, 152–153 representational democracy, 149 types of, 149–150 government top-down government, 199–201 Grafen, Alan, 287 grand unified theory, 121 gravitational waves, 122 Gray, Asa, 287 Grayling, A.


pages: 165 words: 45,129

The Economics of Inequality by Thomas Piketty, Arthur Goldhammer

affirmative action, basic income, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, conceptual framework, deindustrialization, endogenous growth, Gini coefficient, income inequality, low skilled workers, means of production, middle-income trap, moral hazard, Pareto efficiency, purchasing power parity, Robert Solow, Simon Kuznets, Tax Reform Act of 1986, The Bell Curve by Richard Herrnstein and Charles Murray, very high income, working-age population

The lender will also want to make sure that the borrower has sufficient incentives to do what needs to be done over a long period of time even though some of the gains will go to the lender. Finally, the lender needs to assure himself that the borrower will not simply disappear with the profits. Investment thus raises a series of problems that economists have classified as problems of “adverse selection” and “moral hazard.” Such problems arise wherever there is an “intertemporal” market, that is, a market in which exchanges occur in different time periods. Credit markets are intertemporal markets, as are social insurance markets, which we will encounter in Chapter 4. These problems are particularly difficult in international markets, because the information available about potential borrowers and investment projects in another country may be of low quality.

See Price system Marx, Karl, 26, 30, 39; proletarianization thesis of, 17–18 Maximin principle, of Rawls, 2, 35, 106 McGovern, George, 112 Means of production, collectivizing of, 39, 62, 63–64 Minimum wage: EITC and, 109; health insurance and, 103; monopsony power of employers, 96; raising of, and effect on level of employment, 95–96; redistribution and, 75, 94; unions and, 91; in US and France, 50, 110–111, 117; wage distribution and, 8 Monopoly power, of unions, 89, 94 Monopsony power, of employers, 94–96, 113–114, 121 Moral hazard, credit markets and, 60–61 Murray, Charles, 82, 87 Negative income tax, 1, 3, 112–113 Nonwage compensation, 6t, 8, 12, 13. See also Self-employment compensation Norway: historical evolution of inequality, 22; income inequality, 14; wage inequality, 10 OECD countries: evolution of shares of profits and wages, 49–53, 50t; historical evolution of inequality, 21; income inequality, 14–15, 15t; wage inequality, 10–11, 11t Panel Study of Income Dynamics (PSID), 83 Pareto efficiency, 2–3, 57, 79 Part-time work, income inequality and, 25 Pay-as-you-go (PAYGO) pension systems, 117–118 Payroll taxes.


pages: 349 words: 134,041

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, Asian financial crisis, asset-backed security, Bear Stearns, beat the dealer, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business logic, business process, buy and hold, buy low sell high, call centre, capital asset pricing model, collateralized debt obligation, commoditize, complexity theory, computerized trading, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, currency peg, currency risk, disinformation, disintermediation, diversification, diversified portfolio, Edward Thorp, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, financial engineering, financial innovation, fixed income, Glass-Steagall Act, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, John Bogle, John Meriwether, junk bonds, locking in a profit, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, Marshall McLuhan, mass affluent, mega-rich, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mutually assured destruction, Myron Scholes, new economy, New Journalism, Nick Leeson, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, proprietary trading, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, Right to Buy, risk free rate, risk-adjusted returns, risk/return, Salesforce, Satyajit Das, shareholder value, short selling, short squeeze, South Sea Bubble, statistical model, technology bubble, the medium is the message, the new new thing, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, volatility smile, yield curve, Yogi Berra, zero-coupon bond

The absurdities of the compensation scheme lie at the heart of this perverse system. When things go wrong, there is always the ‘rogue’ trader. The implication is that nothing could have been done. It exonerates the management from any malfeasance. Barings provides an insight into this world of ‘moral hazard’ and ‘adverse incentives’. In the year Leeson’s trading losses destroyed the bank, its total profits were about £37 million. Of this amount, Leeson’s ‘profits’ were £41 million. Peter Baring, chairman, observed that it ‘was not all that terribly difficult to make money in the securities business’.

The changes included longer maturity, increased interest rates and new conditions, improving the position of the lender. The maturity extension was a restructuring credit event under a CDS on Conseco. The lenders to Conseco involved in restructuring loans had also bought protection in the CDS market. This created a ‘moral hazard’. The lenders would benefit from a restructuring as it would be a credit event under their CDS. The lenders took refuge behind Chinese walls. Conseco had a lot of outstanding debt. After the restructuring, the short-term bonds traded at around 90% of face value. Conseco’s longerdated bonds traded at prices around 60–70% of face value.

If the average was made of one year of very large losses and several years of no losses, then that didn’t work well either. Some CDOs were actively managed. Managers had been appointed to trade the portfolios, the idea being that they would minimize losses by selling deteriorating credits. They usually compounded losses by making wrong trading decisions. There were ‘moral hazards’. Managers had to invest equity in the CDO they managed which was designed to ‘align interests’ and ‘overcome agency conflicts’. It was a noble idea – when credit losses wiped out equity, the managers lost money. It was their personal wealth, which didn’t worry anybody, but the incentives shifted worryingly.


pages: 165 words: 48,594

Democracy at Work: A Cure for Capitalism by Richard D. Wolff

asset-backed security, Bear Stearns, Bernie Madoff, business cycle, collective bargaining, Credit Default Swap, declining real wages, feminist movement, financial intermediation, Glass-Steagall Act, green new deal, Howard Zinn, income inequality, John Maynard Keynes: technological unemployment, laissez-faire capitalism, means of production, military-industrial complex, moral hazard, mortgage debt, Occupy movement, Ponzi scheme, profit maximization, quantitative easing, race to the bottom, Ronald Reagan, too big to fail, trickle-down economics, wage slave, women in the workforce, Works Progress Administration

So effectively were the few public statements in that direction ignored and repressed that nothing much was said—and certainly nothing was done—about the fact that many of the major US banks were significantly larger in 2012 than they had been in 2007. If there was a “moral hazard” that bailing out big banks during and after 2008 might weaken their resolve to avoid excess risk thereafter, then allowing big banks to become bigger accelerated the moral hazard involved. The second implication that had to be repressed was this: if big banks and other financial enterprises were too big to fail, then perhaps the solution was to nationalize them. Making their assets and liabilities fully transparent and publicly available would minimize the chance of behaviors that placed society at risk.


pages: 356 words: 103,944

The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Asian financial crisis, bank run, banking crisis, Bear Stearns, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, classic study, collective bargaining, colonial rule, Corn Laws, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, Doha Development Round, en.wikipedia.org, endogenous growth, eurozone crisis, export processing zone, financial deregulation, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, George Akerlof, guest worker program, Hernando de Soto, immigration reform, income inequality, income per capita, industrial cluster, information asymmetry, joint-stock company, Kenneth Rogoff, land reform, liberal capitalism, light touch regulation, Long Term Capital Management, low interest rates, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, Multi Fibre Arrangement, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, Paul Samuelson, precautionary principle, price stability, profit maximization, race to the bottom, regulatory arbitrage, Savings and loan crisis, savings glut, Silicon Valley, special drawing rights, special economic zone, subprime mortgage crisis, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

Too much leverage on the part of financial institutions? The global savings glut? Too loose monetary policy by the Federal Reserve? Government guarantees for Fannie Mae and Freddie Mac? The U.S. Treasury’s rescue of Bear Stearns and AIG? The U.S. Treasury’s refusal to bail out Lehman Brothers? Greed? Moral hazard? Too little regulation? Too much regulation? The debate on these questions remains fierce and will no doubt continue for a long time. In the bigger scheme of things, these questions interrogate mere details. More fundamentally, our basic narrative has lost its credibility and appeal. It will be quite some time before any policy maker can be persuaded that financial innovation is an overwhelming force for good, that financial markets are best policed through self-regulation, or that governments can expect to let large financial institutions pay for their own mistakes.

Unfortunately, such failings are legion, which is why we have become so accustomed to the financial market pathologies they produce. Economists are not unaware of these problems. The economics literature is chockful of analyses of these failings, which go by names such as asymmetric information, limited liability, moral hazard, agency costs, multiple equilibria, systemic risk, implicit guarantees, information cascades, and so on. Each one of these phenomena has been studied to death with intricate mathematical reasoning and empirical illustrations. By now most economists also understand that these problems have not been adequately addressed in the global economy.

Terrones, “Growth and Volatility in an Era of Globalization,” IMF Staff Papers, vol. 52, Special Issue (September 2005). 19 “Crisis may be worse than Depression, Volcker says,” Reuters, February 20, 2009 (http://uk.reuters.com/article/ idUKN2029103720090220). 20 Craig Torres, “Bernanke Says Crisis Damage Likely to Be Long-Lasting,” Bloomberg News Service, April 17, 2009. 21 David A. Moss, “An Ounce of Prevention: Financial regulation, moral hazard, and the end of ‘too big to fail,’” Harvard Magazine (September–October 2009) (http://harvardmagazine.com/2009/09/ financial-risk-management-plan?page=0,1). 22 Enrque G. Mendoza and Vincenzo Quadrini, “Did Financial Globalisation Make the US Crisis Worse?” VoxEU.org, November 14, 2009 (http://voxeu.org/index.php?


pages: 261 words: 103,244

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

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

It turned out that if CEOs had large amounts of options, the stock price of the company tended to be unusually high in the months around the retirement, only to fall back to normal soon afterwards. In the group of companies whose CEOs had low option holdings, this was not the case. It would not be hard to devise rules that would take the timing decision and thus the moral hazard away from managers. Law and finance scholar Jesse Fried suggested in 1998 that executives be required to announce their insider trades in advance or that firms require that sales be carried out gradually over a specified period of time. However, it is rare that such effective measures are taken (Fried 1998).

“Fifteen Economists Issue Crisis-Prevention Manual.” New York Times, June 15. Chau, Nancy. 2009. “Sweatshop Equilibrium.” IZA Discussion Paper 4363. Chen, Joseph, Samuel Hanson, Harrison Hong and Jeremy C. Stein. 2008. “Do Hedge Funds Profit from Mutual-Fund Distress?” NBER Working Paper 13786. Chetty, Ray. 2008. “Moral Hazard vs. Liquidity and Optimal Unemployment Insurance.” Journal of Political Economy 116: 173–234. Citizens for Tax Justice. 2011. “Report: 280 Most Profitable U.S. Corporations Shelter Half Their Profits from Taxes; Thirty Companies Paid Less Than Zero in Taxes in the Last Three Years,” November 3. http://www.ctj.org/corporatetaxdodgers/ CorporateTaxDodgersPR.pdf (accessed March 28, 2012).

“Political Connections and Corporate Bailouts.” Journal of Finance 61: 2597–2635. Farber, Henry S. 2005. “What Do We Know About Job Loss in the United States: Evidence from the Displaced Workers Survey, 1984–2004.” Federal Reserve Bank of Chicago Regional Review: 13–28. Farhi, Emmanuel and Jean Tirole. 2009. “Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts.” NBER Working Paper 15138. Farhi, Emmanuel and Iván Werning. 2008. “The Political Economy of Nonlinear Capital Taxation.” Working paper. Feenstra, Robert, Benjamin Mandel, Marshall B. Reisdorf and Matthew J. Slaughter. 2009. “Effects of Terms of Trade and Tariff Changes on the Measurement of U.S.


pages: 160 words: 53,435

Good Prose: The Art of Nonfiction by Tracy Kidder, Richard Todd

Atul Gawande, David Sedaris, demand response, gentleman farmer, In Cold Blood by Truman Capote, Joan Didion, moral hazard, Norman Mailer, Ralph Waldo Emerson, The Bell Curve by Richard Herrnstein and Charles Murray, The Soul of a New Machine, Yogi Berra

The argument against such prose is that it enacts not egotism but egocentrism, the placing of oneself at the center of the universe. But that follows in the great tradition of essay writing. In the essay, one steps forward. Even in the rare case where the first person doesn’t appear, an individual authority is summoned, as in the magisterial critical essays of T. S. Eliot. The self as the measure of all things has its moral hazards, but the essayist needs at least a dash of Emersonian confidence, and more than a dash is useful to some. The essayist can also appear as a figure who boasts of little in the way of heightened emotion or peculiarity of feeling. This sort of writer’s whole claim on the reader is the claim of the norm: I am but a distillation of you.

Certainly, all such relationships contain competing narratives. The subject has a story, the writer has a story, and the two don’t coincide exactly. They may diverge radically. Writer and subject each want something from the other. So what? Life is full of people with varied interests striking a deal. But a special moral hazard arises in the journalistic case, in the multiple opportunities for deception and in the imbalance of power. The relationship between subject and author, according to Malcolm, often amounts to a mutual seduction, in which the journalist inevitably occupies the stronger position: “The moral ambiguity of journalism lies not in its texts but in the relationships out of which they arise—relationships that are invariably and inescapably lopsided.”


pages: 180 words: 55,805

The Price of Tomorrow: Why Deflation Is the Key to an Abundant Future by Jeff Booth

3D printing, Abraham Maslow, activist fund / activist shareholder / activist investor, additive manufacturing, AI winter, Airbnb, Albert Einstein, AlphaGo, Amazon Web Services, artificial general intelligence, augmented reality, autonomous vehicles, basic income, bitcoin, blockchain, Bretton Woods, business intelligence, butterfly effect, Charles Babbage, Claude Shannon: information theory, clean water, cloud computing, cognitive bias, collapse of Lehman Brothers, Computing Machinery and Intelligence, corporate raider, creative destruction, crony capitalism, crowdsourcing, cryptocurrency, currency manipulation / currency intervention, dark matter, deep learning, DeepMind, deliberate practice, digital twin, distributed ledger, Donald Trump, Elon Musk, fiat currency, Filter Bubble, financial engineering, full employment, future of work, game design, gamification, general purpose technology, Geoffrey Hinton, Gordon Gekko, Great Leap Forward, Hyman Minsky, hype cycle, income inequality, inflation targeting, information asymmetry, invention of movable type, Isaac Newton, Jeff Bezos, John Maynard Keynes: Economic Possibilities for our Grandchildren, John von Neumann, Joseph Schumpeter, late fees, low interest rates, Lyft, Maslow's hierarchy, Milgram experiment, Minsky moment, Modern Monetary Theory, moral hazard, Nelson Mandela, Network effects, Nick Bostrom, oil shock, OpenAI, pattern recognition, Ponzi scheme, quantitative easing, race to the bottom, ride hailing / ride sharing, self-driving car, software as a service, technoutopianism, TED Talk, the long tail, the scientific method, Thomas Bayes, Turing test, Uber and Lyft, uber lyft, universal basic income, winner-take-all economy, X Prize, zero-sum game

In an interconnected economy driven by credit and ever more debt, there are no easy choices. Once housing prices had collapsed, governments could 1) bail out the banks and the risk takers, and create moral hazard in doing so, or 2) risk a worldwide depression as trust in the financial system broke down and markets stopped. They chose door number one: bail out the banks and risk takers and create moral hazard in doing so. We have no way of truly knowing how wide and lasting the damage would have been had the governments and central banks of the world not stepped in with massive support to save the economic system.


pages: 205 words: 55,435

The End of Indexing: Six Structural Mega-Trends That Threaten Passive Investing by Niels Jensen

Alan Greenspan, Basel III, Bear Stearns, declining real wages, deglobalization, disruptive innovation, diversification, Donald Trump, driverless car, eurozone crisis, falling living standards, fixed income, full employment, Greenspan put, income per capita, index fund, industrial robot, inflation targeting, job automation, John Nash: game theory, liquidity trap, low interest rates, moral hazard, offshore financial centre, oil shale / tar sands, old age dependency ratio, passive investing, Phillips curve, purchasing power parity, pushing on a string, quantitative easing, regulatory arbitrage, rising living standards, risk free rate, risk tolerance, Robert Solow, secular stagnation, South China Sea, total factor productivity, working-age population, zero-sum game

Even more noteworthy, in the first few years following the Global Financial Crisis, the performance of the S&P 500 on the days that the FOMC convened was no less than 29 times higher than the average daily return (exhibit 2.4). In other words, the sheer presence of those meetings has had a much bigger say on equity prices than what the FOMC actually decided to do. By establishing QE, the Fed effectively created a considerable amount of moral hazard by force-feeding investors risk assets; hence the expression the foie gras market.12 Exhibit 2.4: S&P 500 performance on days the FOMC meet (%) Source: GMO (2016). The link between monetary policy and financial stability has been discussed repeatedly over the years, but nobody has phrased it more eloquently than the late Nicholas Kaldor when, back in 1958, he wrote: “Reliance on monetary policy as an effective stabilising device would involve a high degree of instability.

Exhibit 2.5: US policy-adjusted earnings multiple vs. CAPE multiple over time Source: GMO (2016). As you can see, the CAPE multiple on the S&P 500 would drop from the mid-twenties to the mid-teens, which is much more in line with European CAPE valuations. In other words, if we remove the moral hazard premium created by the Fed, US and European equities are roughly equally expensive (on a CAPE basis). As the love affair with the Fed ends, the multiple spread is therefore likely to narrow; however, nobody knows when that will happen. That said, we do know, as you will see in chapters 4 and 8, that equity valuations (in theory) should be under much more pressure now than they are, and the reason they are not probably has a lot to do with QE.


pages: 482 words: 161,169

Corporate Warriors: The Rise of the Privatized Military Industry by Peter Warren Singer

Apollo 13, barriers to entry, Berlin Wall, blood diamond, borderless world, British Empire, colonial rule, conceptual framework, disinformation, failed state, Fall of the Berlin Wall, financial independence, full employment, Global Witness, Jean Tirole, joint-stock company, Machinery of Freedom by David Friedman, market friction, military-industrial complex, moral hazard, Nelson Mandela, new economy, no-fly zone, offshore financial centre, Peace of Westphalia, principal–agent problem, prisoner's dilemma, private military company, profit maximization, profit motive, RAND corporation, risk/return, rolodex, Ronald Coase, Ronald Reagan, Scramble for Africa, South China Sea, supply-chain management, The Nature of the Firm, The Wealth of Nations by Adam Smith, vertical integration

The reality behind these divergent views is far more complex. To simply paint all PMFs as purely good or purely evil is plain wrong. They are private actors operating in the public realm of warfare. As such, tensions exist between their potential positive and negative human rights impacts. THE MORAL HAZARDS OF MILITARY PRIVATIZATION Members of PMFs bristle at almost any negative characterizations of their business, in particular allegations that they are the equivalent of mercenaries or are more susceptible to commit war crimes. They argue that, in fact, they deserve an opposite normative status.

They can teach local forces standards of military behavior and pass on advice that brutality is not an essential element of strategy. The firms frequently also offer instruction in international laws of warfare as a part of their training packages, if the clients so desire. However, these propensities are balanced by opposite moral hazards that can lead to negative consequences from a human rights standpoint. One of the fundamental issues from a normative standpoint is that the public good and the private firm's good are not always identical. The organizing intent of a private company is to generate internal profit, whereas public agencies are constructed with wider demands.

Doug Brooks, a leading industry proponent who heads a PMF lobby group, puts it even more bluntly. The firm's best employees are often ". . . not nice guys. You wouldn't want them to marry your sister."27 This issue of adverse selection becomes particularly worrisome when placed in the context of the industry, with its layers of moral hazard and diffused responsibilities. Thus, even if PMFs are scrupulous in screening out their hires for human rights violations (which is difficult for a firm to accomplish, given that most of its prospective employee's resumes do not have an "atrocities committed" section), it is still difficult for them to monitor their troops in the field completely.


pages: 524 words: 155,947

More: The 10,000-Year Rise of the World Economy by Philip Coggan

accounting loophole / creative accounting, Ada Lovelace, agricultural Revolution, Airbnb, airline deregulation, Alan Greenspan, Andrei Shleifer, anti-communist, Apollo 11, assortative mating, autonomous vehicles, bank run, banking crisis, banks create money, basic income, Bear Stearns, Berlin Wall, Black Monday: stock market crash in 1987, Bletchley Park, Bob Noyce, Boeing 747, bond market vigilante , Branko Milanovic, Bretton Woods, Brexit referendum, British Empire, business cycle, call centre, capital controls, carbon footprint, carbon tax, Carl Icahn, Carmen Reinhart, Celtic Tiger, central bank independence, Charles Babbage, Charles Lindbergh, clean water, collective bargaining, Columbian Exchange, Columbine, Corn Laws, cotton gin, credit crunch, Credit Default Swap, crony capitalism, cross-border payments, currency peg, currency risk, debt deflation, DeepMind, Deng Xiaoping, discovery of the americas, Donald Trump, driverless car, Easter island, Erik Brynjolfsson, European colonialism, eurozone crisis, Fairchild Semiconductor, falling living standards, financial engineering, financial innovation, financial intermediation, floating exchange rates, flying shuttle, Ford Model T, Fractional reserve banking, Frederick Winslow Taylor, full employment, general purpose technology, germ theory of disease, German hyperinflation, gig economy, Gini coefficient, Glass-Steagall Act, global supply chain, global value chain, Gordon Gekko, Great Leap Forward, greed is good, Greenspan put, guns versus butter model, Haber-Bosch Process, Hans Rosling, Hernando de Soto, hydraulic fracturing, hydroponic farming, Ignaz Semmelweis: hand washing, income inequality, income per capita, independent contractor, indoor plumbing, industrial robot, inflation targeting, Isaac Newton, James Watt: steam engine, job automation, John Snow's cholera map, joint-stock company, joint-stock limited liability company, Jon Ronson, Kenneth Arrow, Kula ring, labour market flexibility, land reform, land tenure, Lao Tzu, large denomination, Les Trente Glorieuses, liquidity trap, Long Term Capital Management, Louis Blériot, low cost airline, low interest rates, low skilled workers, lump of labour, M-Pesa, Malcom McLean invented shipping containers, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, McJob, means of production, Mikhail Gorbachev, mittelstand, Modern Monetary Theory, moral hazard, Murano, Venice glass, Myron Scholes, Nelson Mandela, Network effects, Northern Rock, oil shale / tar sands, oil shock, Paul Samuelson, Paul Volcker talking about ATMs, Phillips curve, popular capitalism, popular electronics, price stability, principal–agent problem, profit maximization, purchasing power parity, quantitative easing, railway mania, Ralph Nader, regulatory arbitrage, road to serfdom, Robert Gordon, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, savings glut, scientific management, Scramble for Africa, Second Machine Age, secular stagnation, Silicon Valley, Simon Kuznets, South China Sea, South Sea Bubble, special drawing rights, spice trade, spinning jenny, Steven Pinker, Suez canal 1869, TaskRabbit, techlash, Thales and the olive presses, Thales of Miletus, 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 Rise and Fall of American Growth, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, Tragedy of the Commons, transaction costs, transatlantic slave trade, transcontinental railway, Triangle Shirtwaist Factory, universal basic income, Unsafe at Any Speed, Upton Sinclair, V2 rocket, Veblen good, War on Poverty, Washington Consensus, Watson beat the top human players on Jeopardy!, women in the workforce, world market for maybe five computers, Yom Kippur War, you are the product, zero-sum game

On the other hand, when they do bail out the banking sector, they are accused of helping the undeserving. Critics said that the bailouts of 2008 risked taxpayer money in order to protect bankers who had pocketed billions in salaries and bonuses in earlier years. It was a case of privatising the profits and nationalising the losses. The long-term risk was of “moral hazard”; privately owned banks will feel free to take more risks if they believe that the central banks will always bail them out. Ideally, central banks would be able to distinguish between banks that have a liquidity problem and those with a solvency problem. All banks can run into liquidity problems, but, given enough time, they would be able to pay their depositors in full.

Besides, a lot of the debt was owned by institutions such as pension funds and insurance companies who were well placed to deal with the risk of default. When the credit bubble finally burst in 2007 and 2008, central banks faced the same dilemmas that have occurred down the centuries. Worries about moral hazard quickly evaporated in the face of the implosion of the banking system. Central banks lent money freely and also pushed interest rates down to historic lows, and even to negative levels. They unveiled a programme of quantitative easing (QE), in which they created money and used it to buy bonds and other assets (see Chapter 18).

At one point, it borrowed 30 times its capital.36 This proved disastrous when markets fell, so banks refused to keep lending the fund money. A private sector bailout was organised and the Fed cut interest rates again. However, the Fed’s repeated reactions to market wobbles created a problem of “moral hazard”; traders were encouraged to think that central banks would ride to the rescue in a market crisis, with a flurry of rate cuts. Thus the Fed may have increased the incentive to speculate. As LTCM was collapsing, another bubble was emerging. This was linked to the internet, which encouraged a flood of startup companies that promised to transform their industries.


pages: 850 words: 254,117

Basic Economics by Thomas Sowell

affirmative action, air freight, airline deregulation, Alan Greenspan, American Legislative Exchange Council, bank run, barriers to entry, big-box store, British Empire, business cycle, clean water, collective bargaining, colonial rule, corporate governance, correlation does not imply causation, cotton gin, cross-subsidies, David Brooks, David Ricardo: comparative advantage, declining real wages, Dissolution of the Soviet Union, diversified portfolio, European colonialism, fixed income, Ford Model T, Fractional reserve banking, full employment, global village, Gunnar Myrdal, Hernando de Soto, hiring and firing, housing crisis, income inequality, income per capita, index fund, informal economy, inventory management, invisible hand, John Maynard Keynes: technological unemployment, joint-stock company, junk bonds, Just-in-time delivery, Kenneth Arrow, knowledge economy, labor-force participation, land reform, late fees, low cost airline, low interest rates, low skilled workers, means of production, Mikhail Gorbachev, minimum wage unemployment, moral hazard, offshore financial centre, oil shale / tar sands, payday loans, Phillips curve, Post-Keynesian economics, price discrimination, price stability, profit motive, quantitative easing, Ralph Nader, rent control, rent stabilization, road to serfdom, Ronald Reagan, San Francisco homelessness, Silicon Valley, surplus humans, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, transcontinental railway, Tyler Cowen, Vanguard fund, War on Poverty, We are all Keynesians now

Therefore the cost of producing the insured product is less than the cost of producing the product without insurance, so that the price tends to be lower than it would be if the risk had to be guarded against by charging higher prices. “Moral Hazard” and “Adverse Selection” While insurance generally reduces risks as it transfers them, there are also risks created by the insurance itself. Someone who is insured may then engage in more risky behavior than if he or she were not insured. An insured motorist may park a car in a neighborhood where the risk of theft or vandalism would be too great to risk parking an uninsured vehicle. Jewelry that is insured may not be as carefully kept under lock and key as if it were uninsured. Such increased risk as a result of having insurance is known as “moral hazard.” Such changes in behavior, as a result of having insurance, make it more difficult to calculate the right premium to charge.

Forcing all banks and savings & loan associations to have deposit insurance eliminated the problem of adverse selection—but it increased the problem of moral hazard. That is, insured financial institutions could attract depositors who no longer worried about whether those institutions’ policies were prudent or reckless, because deposits were insured up to a given amount, even if the bank or savings & loan association went bankrupt. In other words, those who managed these institutions no longer had to worry about depositors pulling their money out when the managements made risky investments. The net result was more risky behavior—“moral hazard”—which led to losses of more than half a trillion dollars by savings & loan associations during the 1980s.{502} Government regulation can also adversely affect insurance companies and their customers when insurance principles conflict with political principles.

However, if insured motorists become sufficiently careless that one out of every 5,000 cars now suffers the same damage from vandalism, then the premium would need to be twice as large to cover the costs. In other words, statistics showing how motorists currently behave and what damages they currently incur may under-estimate what damages they will incur after they are insured. That is what makes “moral hazard” a hazard to the insurance companies and a source of higher premiums to those who buy insurance. For similar reasons, knowing what percentage of the population comes down with a given illness can also be misleading as to how much it would cost to sell insurance to pay for treatment of that illness.


pages: 32 words: 8,492

Detonation Boulevard: A Tor.Com Original by Alastair Reynolds

moral hazard

‘We’re talking a tiny discrepancy.’ ‘It’s just a question of degrees, Catlin. We’re on the same path, you and I. I’m just further down it.’ ‘I’ll never end up like you.’ ‘What if the choice isn’t yours to make?’ I grew impatient. I’d detoured to rescue Zimmer, not to get drawn into a debate about the moral hazards of our profession. ‘Where’s your emergency kit? I’m going to try and cut you out of that webbing.’ ‘I’m not going anywhere.’ He paused, searched me with his eyes. ‘You were right about me flipping the car. It wasn’t an accident.’ ‘You had the race in the bag.’ ‘It’s not about winning. It’s about something bigger.’


pages: 358 words: 106,729

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

"World Economic Forum" Davos, accounting loophole / creative accounting, Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, assortative mating, bank run, barriers to entry, Bear Stearns, behavioural economics, Bernie Madoff, Bretton Woods, business climate, business cycle, carbon tax, 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, currency risk, diversification, Edward Glaeser, financial innovation, fixed income, floating exchange rates, full employment, Glass-Steagall Act, global supply chain, Goldman Sachs: Vampire Squid, Greenspan put, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kaizen: continuous improvement, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, longitudinal study, low interest rates, machine readable, market bubble, Martin Wolf, medical malpractice, microcredit, money market fund, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, Phillips curve, price stability, profit motive, proprietary trading, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, Savings and loan crisis, school vouchers, seminal paper, short selling, sovereign wealth fund, tail risk, 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

But the government helped make those risks look more attractive than they should have been and kept the market from exercising discipline, perhaps even making it applaud such behavior. Government interventions in the aftermath of the crisis have, unfortunately, fulfilled the beliefs of the financial sector. Political moral hazard came together with financial-sector moral hazard in this crisis. The worrisome reality is that it could all happen again. Put differently, the central problem of free-enterprise capitalism in a modern democracy has always been how to balance the role of the government and that of the market. While much intellectual energy has been focused on defining the appropriate activities of each, it is the interaction between the two that is a central source of fragility.

See health care; physicians medical malpractice Medicare Merrill Lynch Mexico: conditional cash transfers financial crisis of Mian, Atif microcredit middle class migration mobility: economic factors restricting of workers models, economic Mohamad, Mahathir monetary policy: credit expansion and financial stability and housing market and improvements in Japanese Keynesian lags in political influences on reforms of of United States, See also central banks; interest rates money-market funds moral hazard Morgan, J. P., See also JP Morgan Morrice, Brad mortgage-backed securities: credit risk of Fannie Mae and Freddie Mac issues federal purchases of held by banks investors in ratings of risks of, subprime mortgages in tail risks of tranches of mortgage brokers mortgage insurance mortgages: defaults on deregulation of thrift industry FHA foreclosures of historical evolution of interest rates on predatory lending traditional lending process for, See also subprime mortgage market motivations multilateral financial institutions: influence of lending by reforms of See also International Monetary Fund; World Bank mutual fund management companies national home ownership strategy, See also home ownership nationalism Nehru, Jawaharlal New Century Financial New Deal New York City No Child Left Behind Act of noncognitive skills Northern Rock Obama, Barack Obama administration Office of Thrift Supervision O’Neal, Stanley opportunities organizational capital ownership society, See also home ownership Park Chung Hee Paulson, Henry J.


pages: 408 words: 108,985

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz

"World Economic Forum" Davos, accelerated depreciation, Airbnb, Alan Greenspan, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, basic income, behavioural economics, benefit corporation, Berlin Wall, bilateral investment treaty, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, deindustrialization, discovery of DNA, diversified portfolio, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial engineering, financial intermediation, Francis Fukuyama: the end of history, full employment, gender pay gap, George Akerlof, gig economy, Gini coefficient, Glass-Steagall Act, hiring and firing, housing crisis, Hyman Minsky, income inequality, independent contractor, inflation targeting, informal economy, information asymmetry, intangible asset, investor state dispute settlement, invisible hand, Isaac Newton, labor-force participation, liberal capitalism, low interest rates, low skilled workers, market fundamentalism, mini-job, moral hazard, non-tariff barriers, offshore financial centre, open economy, Paris climate accords, patent troll, pension reform, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Ronald Reagan, selection bias, shareholder value, Silicon Valley, sovereign wealth fund, TaskRabbit, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, tulip mania, universal basic income, unorthodox policies, vertical integration, zero-sum game

The former German finance minister, Wolfgang Schäuble, took a parting shot at the notion of shared responsibility for government debt in the Eurozone by calling it “complex and expensive financial engineering.”13 But it is essential to understand a crucial point: Eurozone members have already, in the critical moment of the bailout, taken some mutual responsibility for debts accrued by their weaker members, and they did this as much to save German and French taxpayers as to help Greece. If Europe had not helped Greece, there would have been severe consequences for the French and German banking systems. The Rubicon has already been crossed. Schäuble and others who argue similarly are fixated on what they call the “moral hazard” issue: the risk that the debt mutualization will incentivize countries to become overindebted. This belief is based to a large extent on a total mistrust of the other countries in the EU. But these concerns are grossly exaggerated for at least two reasons. First, no country would put itself through the suffering that Greece has gone through just to get a few more euros transferred from Germany.

Severe conditionality imposed to get access to ESM funds not only undermines that trust, but it also signals there is none. Within certain countries in Europe, there is a fear that without stringent conditionality, one country or the other will take advantage of the ESM, a problem we alluded to in Chapter 1. There is much hand-wringing over this moral hazard, and the risk that because money is being made available for countries in crisis, governments will run their country in such a way merely to access it. The answer revolves around one basic fact: it will never be advantageous, in either a political or economic sense, for a national government to follow economic policies that lead to such a severe downturn that it can request assistance from a European stability fund.

The answer revolves around one basic fact: it will never be advantageous, in either a political or economic sense, for a national government to follow economic policies that lead to such a severe downturn that it can request assistance from a European stability fund. Politically, seeking help from fellow Europeans is embarrassing, painful, and in some cases, fatal. Economically, a request for assistance is bound to dent business and consumer confidence, while the existence of a strong backstop could actually support both. The fear of “moral hazard” is a self-serving excuse of some potential well-off countries not to help their neighbors in their times of need. A silver lining of the crisis is the creativity demonstrated by the ECB in expanding the instruments it is willing to use, such as negative interest rates and quantitative easing.


EuroTragedy: A Drama in Nine Acts by Ashoka Mody

Alan Greenspan, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, book scanning, book value, Bretton Woods, Brexit referendum, call centre, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, debt deflation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, fear index, financial intermediation, floating exchange rates, forward guidance, George Akerlof, German hyperinflation, global macro, global supply chain, global value chain, hiring and firing, Home mortgage interest deduction, income inequality, inflation targeting, Irish property bubble, Isaac Newton, job automation, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, Kickstarter, land bank, liberal capitalism, light touch regulation, liquidity trap, loadsamoney, London Interbank Offered Rate, Long Term Capital Management, low interest rates, low-wage service sector, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, mortgage tax deduction, neoliberal agenda, offshore financial centre, oil shock, open borders, pension reform, precautionary principle, premature optimization, price stability, public intellectual, purchasing power parity, quantitative easing, rent-seeking, Republic of Letters, Robert Gordon, Robert Shiller, Robert Solow, short selling, Silicon Valley, subprime mortgage crisis, The Great Moderation, The Rise and Fall of American Growth, too big to fail, total factor productivity, trade liberalization, transaction costs, urban renewal, working-age population, Yogi Berra

If creditors had not been paid in full, he argued, they would have defaulted on their own creditors, causing “cascading defaults” and greatly “amplifying” the damage.61 206   e u r o t r a g e d y Patting himself on the back, Geithner said, “I thought we were pretty creative.”62 And he recalled with some delight that ECB President Trichet congratulated him for doing a “masterful job.”63 On the need to bail out creditors, US and euro-​area authorities were of like mind. Geithner acknowledged the opposing view, only to dismiss it. “We did create some moral hazard by protecting creditors and counterparties from the consequences of a Bear default,” he said. Creditors quickly recognized that government, having bailed them out this time, would be under pressure to do so again. Thus, with a government safety net extended, creditors could afford to take unwarranted risks in the hope of making big gains. But such moral hazard, Geithner wrote, “was unavoidable.”64 He said that the desire to punish errant creditors only made crises worse. Geithner’s professed concern that if creditors bore losses, “cascading defaults” would follow had no evident factual basis.

This threat was expected to induce good behavior and thus prevent the heart attack from occurring in the first place. But even with the best of intentions, human beings do have heart attacks, and countries do fall on bad times. The Maastricht plan, in its zealous emphasis on nipping in the bud all behavior tainted by moral hazard, defied economics, politics, and history. Lamont wrote that during the Maastricht negotiations, he alerted those who would listen to him that Europe was setting itself up for trouble. Many privately agreed with the concerns he raised. Among them, former French President Giscard d’Estaing, ardent champion of European monetary unity, responded, “The points you make [against the intended construction] are good, but it’s going to happen.”129 December 1991: Kohl Keeps Monetary Union Alive Giscard d’Estaing believed “it’s going to happen,” but although all their conditions had been met, the Germans were not ready to sign on.

Some banks were insolvent; they had made bad bets. The froth of the pre-crisis bubble had hidden the weaknesses of specific banks and had blurred the shaky state of the banking system. Now the hidden and blurry images were coming into sharper focus. The Bear Stearns episode will forever be at the center of the policy debate on “moral hazard.” Were the officials right in using public funds to bail out creditors? Among those who forcefully said yes was Timothy Geithner. There was no alternative, Geithner later wrote. If creditors had not been paid in full, he argued, they would have defaulted on their own creditors, causing “cascading defaults” and greatly “amplifying” the damage.61 206   e u r o t r a g e d y Patting himself on the back, Geithner said, “I thought we were pretty creative.”62 And he recalled with some delight that ECB President Trichet congratulated him for doing a “masterful job.”63 On the need to bail out creditors, US and euro-​area authorities were of like mind.


pages: 227 words: 62,177

Numbers Rule Your World: The Hidden Influence of Probability and Statistics on Everything You Do by Kaiser Fung

Alan Greenspan, American Society of Civil Engineers: Report Card, Andrew Wiles, behavioural economics, Bernie Madoff, Black Swan, business cycle, call centre, correlation does not imply causation, cross-subsidies, Daniel Kahneman / Amos Tversky, edge city, Emanuel Derman, facts on the ground, financial engineering, fixed income, Gary Taubes, John Snow's cholera map, low interest rates, moral hazard, p-value, pattern recognition, profit motive, Report Card for America’s Infrastructure, statistical model, the scientific method, traveling salesman

All bets would be off at that point.” We’ve seen this script before, and it did not have a happy ending. And the troubles do not end there. One might expect the devastation wrought by Hurricane Wilma to have deterred Floridians from moving to the coast, but the trend has showed no sign of easing. Economists blame “moral hazard”: coastal dwellers are less worried about hurricanes because they expect the state to continue the unending bailouts and offer an implicit backstop. New residents believe that if their homes should fall, someone else will pay for the reconstruction, so why not enjoy living along the coast? This alarming trend further aggravates the economics of hurricane insurance.

Queue”), 20, 23 Lau, Rich, 21 Laval, Bruce, 17 Lee, Wen Ho, 128 Lewis, Carl, 112 Lewis, Michael, 9, 87 Lotteries, 137–38, 181 insider wins, 143–46, 151–53, 177–78, 179 odds of winning, 137, 143 percentage of Americans playing, 138 Lowell, Mike, 96, 98, 100, 102, 107, 112, 124 Lund, Zach, 112 Madoff, Bernie, 156 Major League Baseball, 9, 98–100, 106–7, 112, 114–16 Manhattan Project, 9 Margin of error, 174 Marston, William, 113, 117 Martinez, David, 112 McGuinty, Dalton, 145 McGwire, Mark, 95, 98–99, 107, 114 Measuring Up (Koretz), 73 Minnesota Department of Transportation, 15, 21, 158 “Minnesota Merge,” 14–15 Mitchell, George, 100, 116 Moneyball (Lewis), 9 Moral hazard, 93 Munich Re, 87 Muris, Tim, 29, 46 Nightingale, Florence, 3 Norris, Craig, 95, 132, 133 Obama, Barack, 2, 116 Odds, improbable, 137–54, 178–81. See also Airplane crashes; Lotteries O’Malley, T. V., 118 OutbreakNet, 41 Palmeiro, Rafael, 99, 112, 114 Pawlenty, Tim, 22 Performance-enhancing drugs, 95–96, 98–116, 130–31, 160–63, 175–76 Plantenga, Melissa, 33, 41, 42, 173 Poe Financial Group (Bill Poe), 82–86, 89, 91–92, 159, 171 Polygraph tests, 113–33, 167, 181.


pages: 540 words: 168,921

The Relentless Revolution: A History of Capitalism by Joyce Appleby

1919 Motor Transport Corps convoy, agricultural Revolution, Alan Greenspan, An Inconvenient Truth, anti-communist, Asian financial crisis, asset-backed security, Bartolomé de las Casas, Bear Stearns, Bernie Madoff, Bretton Woods, BRICs, British Empire, call centre, Charles Lindbergh, classic study, collateralized debt obligation, collective bargaining, Columbian Exchange, commoditize, Cornelius Vanderbilt, corporate governance, cotton gin, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, Doha Development Round, double entry bookkeeping, epigenetics, equal pay for equal work, European colonialism, facts on the ground, failed state, Firefox, fixed income, Ford Model T, Ford paid five dollars a day, Francisco Pizarro, Frederick Winslow Taylor, full employment, General Magic , Glass-Steagall Act, Gordon Gekko, Great Leap Forward, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Hernando de Soto, hiring and firing, Ida Tarbell, illegal immigration, informal economy, interchangeable parts, interest rate swap, invention of movable type, invention of the printing press, invention of the steam engine, invisible hand, Isaac Newton, James Hargreaves, James Watt: steam engine, Jeff Bezos, John Bogle, joint-stock company, Joseph Schumpeter, junk bonds, knowledge economy, land bank, land reform, Livingstone, I presume, Long Term Capital Management, low interest rates, Mahatma Gandhi, Martin Wolf, military-industrial complex, moral hazard, Nixon triggered the end of the Bretton Woods system, PalmPilot, Parag Khanna, pneumatic tube, Ponzi scheme, profit maximization, profit motive, race to the bottom, Ralph Nader, refrigerator car, Ronald Reagan, scientific management, Scramble for Africa, Silicon Valley, Silicon Valley startup, South China Sea, South Sea Bubble, special economic zone, spice trade, spinning jenny, strikebreaker, Suez canal 1869, the built environment, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thorstein Veblen, total factor productivity, trade route, transatlantic slave trade, transcontinental railway, two and twenty, union organizing, Unsafe at Any Speed, Upton Sinclair, urban renewal, vertical integration, War on Poverty, working poor, Works Progress Administration, Yogi Berra, Yom Kippur War

Wisdom is required too. Economists are now talking about something called moral hazard, a term that refers to the dangers of giving people the wrong incentives. It’s a moral hazard for the government to bail out banks because bankers in the future will take foolish risks if they conclude that they will not have to pay for them. It’s reminiscent of the expert who claimed that “capitalism without bankruptcy is like Christianity without hell.”18 A systematic means of controlling sin apparently is as necessary in economics as it is in religion. The phrase “moral hazard” itself suggests that market participants now realize that capitalism has an essential underpinning in social norms.

Only recently has an ethic of pleasure seeking become prevalent. And that’s the problem. The free enterprise economy depends upon competition, sensible choices, and widely shared information, even as it rewards people who corner a market, trick others into foolish bargains, and use secret information to their own advantage. It’s just possible that the real moral hazard today is that capitalism is battening off an older ethic taught by parents and teachers when there was an adult consensus about how to rear children to behave responsibly. If this set of values fades altogether, we will be bereft of the moral base of capitalism, which depends upon men and women’s meeting obligations, managing resources prudently, valuing hard work, and treating others fairly.


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

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, book value, break the buck, business cycle, 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 engineering, financial innovation, financial intermediation, fixed income, George Akerlof, Glass-Steagall Act, Growth in a Time of Debt, income inequality, information asymmetry, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, junk bonds, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, Paul Volcker talking about ATMs, peer-to-peer lending, proprietary trading, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Satyajit Das, Savings and loan crisis, shareholder value, sovereign wealth fund, subprime mortgage crisis, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

., 298n39 monetization, 322n32 money: banknotes as, history of, 149–50, 250n18, 293nn6–9; cartalist view of, 294n10, 294n14; of central banks, 151, 295n16; deposits treated as, 150, 293n10; liquidity provision and, 210; political impact of, 203, 325n48; purchasing power of, 157, 296n26, 297n37; quantity of, definitions of, 294n10 money creation (printing): electronic versus physical, 322n32; in euro area, 201; and inflation, 157–58, 276n6, 294n14, 295n16, 296n26, 297n37, 322n34; limitations on, 157–58; as “liquidity support,” 158; to pay sovereign debt, 102, 276n6, 322n32 money-like debt, 154–56, 160 money machine, 119, 281nn9–10; arbitrage opportunity as, 103, 276n9; bank borrowing from central banks as, 138; blanket guarantees as, 287n6, 291n30; zero-equity mortgages as, 136 money market, definition of, 48 money market funds (mutual funds): contagion in, 62–63; versus deposit institutions, 67, 309n47; deposit insurance for, lack of, 67, 93, 309n47; efforts to reform, 232n16, 259n30; European sovereign debt and, 170, 302n3; in financial crisis of 2007-2009, 62–63, 66, 138, 161; and French banks, 192; as funding source for banks, 48, 62–63, 67; guarantees for, 161; interconnectedness and, 66–67; interest rates of, 53–54, 67; legal definition of banks and, 309n47; Lehman bankruptcy and, 62–63, 66, 256n9, 309n47; liquidity narrative and, 330n12; mechanisms of, 67; as off-balance-sheet entities, 84; origins of, 53–54, 67, 251n27, 299n46, 335n53; reductions in lending by, 62–63; regulation of, 54, 67, 161, 251n27, 300n48, 309n47, 335n53; rise of, 66–67, 299n46; risks of, 299n46; runs on, 62–63, 67, 93, 161; in securitization of mortgages, 159–60; as shadow banking institutions, 225, 335n53 money view of banking, 250n18 Monopoly (game), 35 monopoly power: of banks, 249n12, 275n4; in telecommunications, 327n63 Moody’s Global Credit Division, 235n31 Moody’s Investors Services, 235n31 moral hazard. See incentives and moral hazard Morgan Stanley: change in status to bank holding company, 93, 138, 286n1; and knowledge about LIBOR scandal, 328n4; large trading losses of, 260n39; mistakes admitted by, 232n17 Morgenson, Gretchen, 234n27, 259n34, 300n47, 300n50, 325n49, 329n8, 331nn20–21, 332n28, 336n54 Morris, Charles S., 270n33, 333n40 Morris, Stephen, 330n17 mortgage(s), 18–24; adjustable-rate, 34, 160, 243n2, 298n44; in covered bonds, 254nn47–48, 298n41; creditworthiness assessments for, 56, 58, 248n9, 277n12; default on (See mortgage default); down payments and, 18–24, 22t; in financial crisis of 2007-2009, 59, 60–61, 65–66; financial distress and, 42–43, 246n18; guarantees on, impact of, 130–36, 132t, 134t, 142–43, 145–46, 287nn6–8; in home owner balance sheets, 18, 19f, 20, 20f, 23; interest payments on, 18–19, 21, 117–19, 140, 240n8, 289nn21–22; interest rates on, 34, 104, 105, 117, 160, 276n12, 280n6; leverage effect in, 19, 21–22, 107–8, 118–19; in liquidity transformation, 158–59; in maturity transformation, 158–59; nonrecourse clauses in, 21, 23, 240n5; prime, 254n43; problems caused by burden of, 33–34; return on equity in, 117–19, 118t, 135, 280n7, 287n7; risks of, 18–24, 102–3; second, 34, 44, 240n5, 247nn21–22, 286n5; securitization of (See securitization); solvency problems of S&Ls from, 54, 159, 252n32; subprime (See subprime mortgage(s)); tax subsidies for, 140, 289n22; underwater, 20–21, 42, 95, 133, 246n18; zero-equity, 135–36, 287–88nn8–9 mortgage-backed securities (MBS): breakdown of markets for, 58–59; in collateralized debt obligations, 255n2; versus covered bonds, 254nn47–48; definition of, 58; interconnectedness in, 68; as liquid assets, 272n44; in mortgage-related securities, 255n2; securitization of, 159, 255n2 mortgage default, 34, 243nn1–2; adjustable rates and, 34, 160, 243n2, 298n44; in financial crisis of 2007-2009, 211, 243n2; risk of, in costs of borrowing, 103, 105; securitization and, 58, 68, 254n43; in UK, 34, 243n1; in United States, 34.

Journal of Financial Economics 99: 11–26. Farber, David B., Marilyn F. Johnson, and Kathy R. Petroni. 2007. “Congressional Intervention in the Standard-Setting Process: An Analysis of the Stock Option Accounting Reform Act of 2004.” Accounting Horizons 21 (1): 1–22. Farhi, Emmanuel, and Jean Tirole. 2011. “Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts.” Working paper. Harvard University, Cambridge, MA, and Toulouse School of Economics, University of Toulouse, Toulouse, France. FCIC (Financial Crisis Inquiry Commission). 2011. The Financial Crisis Inquiry Report. Washington, DC: U.S. Government Printing Office.

See International Monetary Fund implicit guarantees and subsidies, 136–39; bankers’ claims about, 235n30; from central banks, in bank borrowing, 137–38; and concentration in banking, 89, 144, 290nn28–29; and credit ratings, 235n32, 291n33; in financial crisis of 2007-2009, 137–38; funding costs affected by, 137–38, 140–42, 290n29; perverse incentives from, 130, 139, 142–45, 198; as unlimited, 129, 137 incentives and moral hazard: in bank borrowing, 129, 130, 142–45, 220; for becoming too big to fail, 130, 142–45, 218; in bonuses, 162; in capital regulation, 95; career concerns and, 127, 228, 319n9; in compensation, 116, 122–27, 283n21, 284n24, 284n27; and corporate governance, 277n13; in creditworthiness assessments, 56, 58; in debt overhang, 130, 162–63; in evaluation of insolvency, 41; gambling for resurrection, 33, 54–55; induced by guarantees, 130, 139, 142–45, 198; for lending versus trading assets, 267n19; in mergers, 89; and need for banking regulation, 81; and securitization, 58; in tax code, 139–40 income: corporate, definition of, 140; per capita, impact of financial crisis of 2007–2009 on, 237n42 Independent Commission on Banking (ICB), 90, 218n8, 321n28, 325n53 indexed debt, 276n6 India, banking crisis in, 258n22 Industriekreditbank, 258n27, 259n29, 266n9, 299n45 inflation: of 1970s, 53; money creation in, 157–58, 276n6, 294n14, 295n16, 296n26, 297n37, 322n34; in Germany, 294n14 information contagion, 269n24 innovation, role of risk taking in, 216 innovations, financial: of 1980s and 1990s, 57–59; and interconnectedness, 66–69; risk management through, 68–74; and safety of banking system, 70–74.


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Crude Volatility: The History and the Future of Boom-Bust Oil Prices by Robert McNally

"World Economic Forum" Davos, Alan Greenspan, American energy revolution, Asian financial crisis, banking crisis, barriers to entry, Bear Stearns, Bretton Woods, collective bargaining, credit crunch, energy security, energy transition, geopolitical risk, housing crisis, hydraulic fracturing, Ida Tarbell, index fund, Induced demand, interchangeable parts, invisible hand, joint-stock company, market clearing, market fundamentalism, megaproject, moral hazard, North Sea oil, oil rush, oil shale / tar sands, oil shock, peak oil, price discrimination, price elasticity of demand, price stability, sovereign wealth fund, subprime mortgage crisis, Suez canal 1869, Suez crisis 1956, transfer pricing, vertical integration

Paris: International Energy Agency, 1995. Seba, Erwin. “Exclusive: After Motiva Split, Saudi Aramco Aims to Buy More U.S. Refineries—Sources.” Reuters, March 18, 2016. http://www.reuters.com/article/us-saudi-aramco-exclusive-idUSKCN0WK2HX. Seeking Alpha. “Oil and Gas Debt—The Next Moral Hazard?” March 23, 2106. http://seekingalpha.com/article/3960612-oil-gas-debt-next-moral-hazard. Seymour, Ian. “Plus Points in New OPEC Production Cutback Accord Should Outweigh Initial Market Scepticism.” Middle East Economic Survey, June 29, 1998. https://mees.com/opec-history/1998/06/29/plus-points-in-new-opec-production-cutback-accord-should-outweigh-initial-market-scepticism/. ——.

Custom Table Builder, Short-Term Energy Outlook, EIA. 96. Ibid. 97. Spot Brent prices, EIA. Hereafter I will revert to using WTI prices as a global benchmark. 98. Stubbington and Kantchev, “Oil, Stocks at Tightest Correlation.” 99. Domanski et al., “Oil and Debt.” 100. Harrington, “Oil Credit Crunch.” 101. “Oil and Gas Debt—The Next Moral Hazard?” Seeking Alpha; Spross, “Does the Oil Crash Signal Another Financial Crisis?” 102. Torchia, “Saudi’s Naimi Says Output Freeze Enough.” 103. It is important to distinguish between OPEC producers-mainly Saudi Arabia-making emergency cuts after shock lows such as in 2008 or 1998–1999 or small, temporary adjustments up and down based on seasonal or market factors, on the one hand, and the willingness to surrender substantial and sustained market share in response to structural oversupply, on the other.


pages: 210 words: 65,833

This Is Not Normal: The Collapse of Liberal Britain by William Davies

Airbnb, basic income, Bernie Sanders, Big bang: deregulation of the City of London, Black Lives Matter, Boris Johnson, Cambridge Analytica, central bank independence, centre right, Chelsea Manning, coronavirus, corporate governance, COVID-19, credit crunch, data science, deindustrialization, disinformation, Dominic Cummings, Donald Trump, double entry bookkeeping, Edward Snowden, fake news, family office, Filter Bubble, Francis Fukuyama: the end of history, ghettoisation, gig economy, global pandemic, global village, illegal immigration, Internet of things, Jeremy Corbyn, late capitalism, Leo Hollis, liberal capitalism, loadsamoney, London Interbank Offered Rate, mass immigration, moral hazard, Neil Kinnock, Northern Rock, old-boy network, post-truth, postnationalism / post nation state, precariat, prediction markets, quantitative easing, recommendation engine, Robert Mercer, Ronald Reagan, sentiment analysis, sharing economy, Silicon Valley, Slavoj Žižek, statistical model, Steve Bannon, Steven Pinker, surveillance capitalism, technoutopianism, The Chicago School, Thorstein Veblen, transaction costs, universal basic income, W. E. B. Du Bois, web of trust, WikiLeaks, Yochai Benkler

This isn’t as implausible as it may sound. Since the 1960s, conservatism has been defined partly by a greater willingness to inflict harm, especially in the English-speaking world. The logic is that the augmentation of the postwar welfare state by the moral pluralism of the 1960s produced an acute problem of ‘moral hazard’, whereby benign policies ended up being taken for granted and abused. Once people believe things can be had for free and take pleasure in abundance, there is a risk of idleness and hedonism. In the United States, this fear was expressed in the cultural conservatism of the Nixon era, during which moral opprobrium was visited on welfare claimants and feckless liberals.

An alternative perspective on that achievement is that hardship has forced people into worse jobs, demanding fewer skills and lower capital investment, so that Britain’s productivity growth has stalled to a degree not seen since the Industrial Revolution. That is what happens when work is framed as a moral duty, to be engaged in at all costs. The fear of ‘moral hazard’ produces a punitive approach to debtors, be they households, firms or national governments, the assumption being that anything short of harshness will produce a downward spiral of generosity, forgiveness and free-riding, eventually making the market economy unviable. Osborne liked to claim (against all the evidence coming from the bond markets) that if Britain kept borrowing, lenders would lose trust in the moral rectitude of the government and interest rates would rise.


Falling Behind: Explaining the Development Gap Between Latin America and the United States by Francis Fukuyama

Andrei Shleifer, Atahualpa, barriers to entry, Berlin Wall, British Empire, business climate, Cass Sunstein, central bank independence, collective bargaining, colonial rule, conceptual framework, creative destruction, crony capitalism, European colonialism, Fall of the Berlin Wall, first-past-the-post, Francis Fukuyama: the end of history, Francisco Pizarro, Hernando de Soto, income inequality, income per capita, land reform, land tenure, Monroe Doctrine, moral hazard, New Urbanism, oil shock, open economy, public intellectual, purchasing power parity, rent-seeking, Ronald Reagan, The Wealth of Nations by Adam Smith, total factor productivity, trade liberalization, transaction costs, upwardly mobile, Washington Consensus, zero-sum game

As Dani Rodrik has phrased it: “the question before policymakers . . . is no longer do institutions matter, but which institutions matter and how does one acquire them?”32 Rodrik sets out a cogent agenda for state reform, and he states that institutions must facilitate the development and consolidation of a clearly designated system of property rights, a regulatory apparatus curbing the worst forms of fraud, anti-competitive behavior and moral hazard, a moderately cohesive society exhibiting trust and social cooperation, social and political institutions that mitigate risks and manage social conflicts, the rule of law and clean government.33 The challenge is enormous. But Latin American leaders need to assume the responsibility of creating smart states or run the risk of continued discontent and resentment by their citizens at their failure to produce growth and improve equity.

From this perspective, and as we explained in the previous section, even though there has been dramatic institutional change in Latin America since 1982, characterized by transitions from authoritarian to democratic rule and from relatively closed, state-led economies to open, market-driven economies, weak states whose jurisdiction and enforcement capacities have remained weak and open to traditional capacity-draining activities, such as rent seeking and moral hazard, have helped to reproduce the conditions that allow the survival and growth of high-stakes politics. To this element, we have to add others, namely, the persistence of dramatic socioeconomic inequality and widespread poverty, which have nurtured the zero-sum conditions that allow high-stakes politics to thrive and dominate in Latin America at the beginning of the twenty-first century.

In many ways, the Reagan and Thatcher revolutions, which sought to cut back the scope of the state, occurred because the modern welfare state had become too large and dysfunctional. Europe today is facing a looming crisis of competitiveness because its labor markets are encumbered with regulations designed to protect workers but whose actual effect is to raise levels of unemployment. Transfer payments and subsidies come to be seen as entitlements; they create moral hazards and disincentives to work. What is true for wealthy countries in Western Europe is doubly so for poorer countries like Brazil and Argentina, which tried to implement European-style worker protections back in the 1940s and 1950s, when they were at a much lower level of development. Part of the overbuilt state that neoliberal reformers were trying to dismantle consisted precisely of social welfare programs that had become excessively expensive and/or counterproductive.


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The Ascent of Money: A Financial History of the World by Niall Ferguson

Admiral Zheng, Alan Greenspan, An Inconvenient Truth, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Bear Stearns, Black Monday: stock market crash in 1987, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, classic study, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, equity risk premium, financial engineering, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, Future Shock, German hyperinflation, Greenspan put, Herman Kahn, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, Nelson Mandela, Nick Bostrom, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, risk free rate, Robert Shiller, rolling blackouts, Ronald Reagan, Savings and loan crisis, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, stocks for the long run, structural adjustment programs, subprime mortgage crisis, tail risk, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, transaction costs, two and twenty, undersea cable, value at risk, W. E. B. Du Bois, Washington Consensus, Yom Kippur War

Yet all their deposits were still effectively insured, with the maximum covered amount raised from $40,000 to $100,000. And, if ordinary deposits did not suffice, the S&Ls could raise money in the form of brokered deposits from middlemen, who packaged and sold ‘jumbo’ $100,000 certificates of deposit.39 Suddenly the people running Savings and Loans had nothing to lose - a clear case of what economists call moral hazard.40 What happened next perfectly illustrated the great financial precept first enunciated by William Crawford, the Commissioner of the California Department of Savings and Loans: ‘The best way to rob a bank is to own one.’41 Some S&Ls bet their depositors’ money on highly dubious projects. Many simply stole it, as if deregulation meant that the law no longer applied to them.

The collapse of a major financial institution, in which retail customers lose their deposits, is therefore an event which any regulator (and politician) wishes to avoid at all costs. An old question that has raised its head since August 2007 is how far implicit guarantees to bail out banks create a problem of moral hazard, encouraging excessive risk-taking on the assumption that the state will intervene to avert illiquidity and even insolvency if an institution is considered too big to fail - meaning too politically sensitive or too likely to bring a lot of other firms down with it. From an evolutionary perspective, however, the problem looks slightly different.

Marshall Plan 305-7 Martin, William McChesney Jr 168 Marx, Groucho 161 Marx, Karl/ Marxism 17 Marylebone Workhouse 199-203 Mary Poppins 7 Massachusetts Affordable Housing Alliance 266 Massys, Quentin 43 Masulipatnam 130 mathematics: applied to finance and insurance 3 Chinese 32 history of 30-32 Oriental 3 Matheson, James 289-92 Medicare and Medicaid 211 Medici family 3 diversification 44-6 libro segreto 44-5 Medici, Cosimo (C15) 42 Medici, Duke Cosimo de’ (C16) 41 Medici, Giovanni di Bicci de’ 42 Medici, Lorenzo the Magnificent 46-7 Mediterranean 24-5 Memphis 59-60 mercenaries 69-71 merchant banks 53 Merchant of Venice see Shakespeare, William mergers and acquisitions 351 Meriwether, John 322 Merrill Lynch 272 Merton, Robert 320 Mesopotamia/Babylonia 27-31 metals, link with money 1 Mexico 25 Miami 264 Michelet, Jules 90 micro-businesses 280 microfinance 13 Middle East 135 sovereign wealth funds 9 war in 6 migration 286 Milan 70 millionaires 146 Minsky, Hyman 164 MIRAS see Mortgate Interest Relief At Source misconduct see fraud Mishkin, Frederic 342 Mississippi 90. see also bubbles; Katrina Mississippi Company (former Company of the Indies, Compagnie des Indes) 142-57 Mohamad, Mahathir bin 314 Moivre, Abraham de 189 Moluccas 130-31 monarchs see royal funding monetary policy: and decline in asset prices 163 and domestic objectives 306-7 and mortgage crisis 266 transformation of 116 monetary theory 100-101 money: criteria for 23-4 driving force behind progress 342 as god 85 market 54 potential excess of 64 prejudices against 1-2 as representation of: belief and trust 29-30; commoditized labour 17; relationship between debtor and creditor 341 tokens as 27 as total of specific liabilities incurred by banks 51 see also coins; electronic money; paper money moneylenders: hostility to 2 illegal see loan sharks vulnerability to defaults 37-8 moneyless societies 17-19 money supply: definitions 50-51 increasing 26 and war 100 ‘mono-line’ financial services 353 monopolies 135 Monopoly (game) 230-32 Montagu, Lady Mary Wortley 146 Moody’s 268 Moore, Deborah 196n. moral hazard 255 Morgan (J. P.) 326n. Morgan Stanley 337. Morocco 297 mortality statistics 188. see also life expectancy Mortgage Interest Relief At Source (MIRAS) 252 mortgages 8-9 adjustable-rate (ARMs) 264 discrimination in 248-51 and economic downturns 8 federal government and 247 fixed-rate residential 264 foreclosures 242 in Great Depression/New Deal 247 history 8-9 indebtedness 61 ‘no recourse’ 270n.


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Samuelson Friedman: The Battle Over the Free Market by Nicholas Wapshott

2021 United States Capitol attack, Alan Greenspan, bank run, basic income, battle of ideas, Bear Stearns, Berlin Wall, Bretton Woods, business cycle, California gold rush, collective bargaining, coronavirus, corporate governance, COVID-19, creative destruction, David Ricardo: comparative advantage, Donald Trump, double helix, en.wikipedia.org, fiat currency, financial engineering, fixed income, floating exchange rates, full employment, God and Mammon, greed is good, Gunnar Myrdal, income inequality, indoor plumbing, invisible hand, John von Neumann, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, light touch regulation, liquidity trap, lockdown, low interest rates, Machinery of Freedom by David Friedman, market bubble, market clearing, mass immigration, military-industrial complex, Money creation, money market fund, Mont Pelerin Society, moral hazard, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, paradox of thrift, Paul Samuelson, Philip Mirowski, Phillips curve, price mechanism, price stability, public intellectual, pushing on a string, quantitative easing, rent control, road to serfdom, Robert Bork, Robert Solow, Ronald Coase, Ronald Reagan, school vouchers, seminal paper, Simon Kuznets, social distancing, Tax Reform Act of 1986, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, too big to fail, trickle-down economics, universal basic income, upwardly mobile, urban renewal, War on Poverty, We are all Keynesians now, Works Progress Administration, zero-sum game

Freddie and Fannie are from now on the on-stage dummies run by [Treasury Secretary Hank] Paulson9-Bernanke ventriloquists. … It’s tough-donuts time for fervent inflation targetters.10 Summers replied: I agree with you the situation is grave, the government will have to do much more. … No time for moral hazard speeches. … But what about Fannie and Freddie? No time to shrink or restrict them. But when Paulson and Bernanke run them, why should it be done for sake of current management and shareholders? … By the way I am still young and naïve, but Fannie Freddie were worst special interest corruption I saw in 8 years in government.

Friedman’s championing of the free market had been hugely successful in his lifetime, but the financial freeze shook the commonly held belief that free-market forces, left to their own devices, would act to ensure the perpetual prosperity, full employment, and growth that Americans demanded. The same tone-deaf legislators who had voted down TARP led the charge against any federal government action that would hasten a recovery. There was talk that bailing out companies presented a “moral hazard” that would encourage recklessness among financiers confident in the knowledge that the government would step in and save them at the last moment. But the principle that the government should keep out of the way and let the market do its worst had been shaken to destruction. In the heat of the crisis, no respected economist could be found to argue that it would be better to watch the economy fall off a cliff and wait for the market to provide a solution.18 Friedman’s perennial prescription, to give the market time to cure itself, was not found wanting; it wasn’t even considered.

., 28, 307 M0 money supply, 200, 247, 331 M1 money supply, 101, 189–90, 211–12, 247, 320, 333 M2 money supply, 189–90, 320 M3 money supply, 189, 212, 320 M4 money supply, 320 Mnuchin, Steven Terner, 287, 342 Modigliani, Franco, 102, 282–83, 315, 323 monetarism failure of, 213–14, 216, 243–46 inflation explained by, 74 Monetary History of the United States and, 45 postwar revival in interest, 133–34, 323 regulation of velocity of money, 106 Volcker abandonment of, 212 Volcker skepticism about, 178–80, 181–85, 189, 235 see also British monetarism; quantity theory of money; individual economists “Monetarism is Not Enough” (Joseph), 238 Monetary History of the United States, 1867–1960, A (Friedman and Schwartz), 34, 44–45, 103–5, 125, 134, 144, 262–63, 309 monetary policy Friedman on, 70, 106–8, 109, 111, 113, 129–31, 289–90 inflation and, 111–12 lag between action and result, 110, 113, 129, 130–31, 137 Volcker’s use of against inflation, 186–92, 194–95, 202–4 see also Federal Reserve Mont Pèlerin meetings, 35–37, 82, 309 moral hazard, 278 Morgenstern, Oskar, 180, 330 Morton, Walter A., 31, 308 Muir, Malcolm Sr. and Jr., 3 multiplier effect, 14, 18–19, 39, 97, 100, 133 Mundell, Robert, 332 Murdoch, Rupert, 226 Myrdal, Gunnar, 164 NAFTA (North American Free Trade Agreement), 251, 252, 291 National Bureau of Economic Research (NBER), 29–30, 144 National Endowments for the Arts and Humanities, 85 National Resources Committee, 29, 308 National Union of Mineworkers, 232–33 neoclassical synthesis, 20–21, 97, 281, 284, 287, 294 New Deal, 20, 29–31, 30, 288, 311 New Economics. see Keynesianism Newsweek magazine changes made by Elliott, 4–5, 7–8, 9 early history, 3 Friedman’s agreement to write for, 8–9, 53 Friedman’s departure, 225–26 impact of Samuelson and Friedman columns, 9, 53, 56 sale to Graham, 3–4 Samuelson’s agreement to write for, 7, 24, 54–55 Samuelson’s departure, 223–25 writing style of Samuelson/Friedman columns, 10, 56–60 Niehans, Jürg, 243, 337 Night to Remember, A (movie), 2, 301 Nixon, Richard M.


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Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

Abraham Maslow, Alan Greenspan, Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, buy low sell high, capital controls, central bank independence, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, currency risk, diversification, diversified portfolio, family office, financial engineering, fixed income, glass ceiling, Glass-Steagall Act, global macro, Greenspan put, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, inverted yield curve, John Meriwether, junk bonds, land bank, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, Market Wizards by Jack D. Schwager, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, oil shock, out of africa, panic early, paper trading, Paul Samuelson, Peter Thiel, price anchoring, proprietary trading, purchasing power parity, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, tail risk, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, Vision Fund, yield curve, zero-coupon bond, zero-sum game

If they could get a real job, they would not be working for the government. Look at Greenspan, he is a bureaucrat. He has failed at everything he has done.That is why he kept trying to get government jobs. Look at his career history and look at his history as a central banker—it is a mess. Is moral hazard one of the biggest problems in the world right now? I do not sit around worrying about moral hazard but it is always a mistake to bail people out. Look at the Japanese—they have been bailing out their people for 14 years and supporting zombie companies. If they had just let them collapse, Japan would have been a great success story the past 10 years. 230 INSIDE THE HOUSE OF MONEY It is interesting that Greenspan is always going on the circuit saying to the Japanese, “Why don’t you clean out your system?

See also Deutsche mark; Swiss franc Mark-to-market, 25, 133, 137, 140 Martin,William McChesney, 13 Maslow,Abraham, 264 Maslow’s Hierarchy of Needs, 264–265 Mean reversion, 69, 112, 258 Mergers and acquisitions, 24 Meriwether, John, 24, 158 Merton, Robert, 24 Metals, 257 Mexico/Mexican peso, 39, 204, 210, 261, 286–287, 290, 296 Microeconomics, 257 Micromanagement, 32, 52, 60 Microsoft, 59 MinFin, 293 Minimum funding requirements (MFR), 136 Mining, 252 Misalignments, 174 Mispricings, 63, 335 Modern portfolio theory, 232 Mohamad, Mahathir, 20 Monetary policy, 168–169, 327 Money management, 185 Money Masters (Train), 244 Money supply, 93 Mongolia, 261, 289, 306 Moore Capital Management, 134–135, 144, 154–155 Moral hazard, 229–230 Mraz, Jason, 241 MSCI Emerging Markets Eastern Europe, 299 Mullins, David, 24 Multibet portfolio approach, 343–344 Multistrategy hedge fund, 33 Multiyear lockups, 69 Mutual funds, 53, 143, 219–220, 300 NAFTA, 287 NASDAQ, 27–28, 54, 144, 146, 227, 254, 277, 279, 291 National Bureau of Economic Research (NBER), 62 National Health Service (United Kingdom), 61 Natural disasters, economic impact of, 296–297, 349 Natural gas, 256, 263 Negative gamma, 330, 336 Net asset value (NAV), 58, 95, 137, 283 Netherlands, 68, 111 Neuberger, Roy, 233 New economy, 27 Newsletters, 104, 119–120, 130 New Zealand/New Zealand dollar, 66, 151, 167–168, 193 Nicholas, Joseph G., ix, xiv Nifty Fifty, 29 Nigeria, 60 Nixon Administration, 7 Nonprice indicators, 192 Normal distribution, 343–344 North Korea, 305 Nuclear war, 44 “Off the run” bonds, 24 Oil, 166, 193, 219, 230–231, 235, 237, 239, 252, 256, 280 Old economy, 27 Olink, Glen, 9 1-percent-a-month strategy, 292 “On the run” bonds, 24 Open-ended trends, 258 Optimistic traders, 112–113, 272 Option(s), 11, 24, 45, 85, 127, 177, 207, 331–332.


Super Continent: The Logic of Eurasian Integration by Kent E. Calder

"World Economic Forum" Davos, 3D printing, air freight, Asian financial crisis, Bear Stearns, Berlin Wall, blockchain, Bretton Woods, business intelligence, capital controls, Capital in the Twenty-First Century by Thomas Piketty, classic study, cloud computing, colonial rule, Credit Default Swap, cuban missile crisis, deindustrialization, demographic transition, Deng Xiaoping, disruptive innovation, Doha Development Round, Donald Trump, energy transition, European colonialism, export processing zone, failed state, Fall of the Berlin Wall, foreign exchange controls, geopolitical risk, Gini coefficient, high-speed rail, housing crisis, income inequality, industrial cluster, industrial robot, interest rate swap, intermodal, Internet of things, invention of movable type, inventory management, John Markoff, liberal world order, Malacca Straits, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, new economy, oil shale / tar sands, oil shock, purchasing power parity, quantitative easing, reserve currency, Ronald Reagan, seigniorage, Shenzhen special economic zone , smart cities, smart grid, SoftBank, South China Sea, sovereign wealth fund, special drawing rights, special economic zone, Suez canal 1869, Suez crisis 1956, supply-chain management, Thomas L Friedman, trade liberalization, trade route, transcontinental railway, UNCLOS, UNCLOS, union organizing, Washington Consensus, working-age population, zero-sum game

There have The Logic of Integration 95 been attempts, such as the 1991 Northeast Asian Development Bank proposal of former Korean prime minister Nam Duck Woo, informally backed for years by the Korean government, to supplement this “Washington Consensus” structure.71 Yet these revisionist proposals for many years invariably failed due to quiet opposition— or at least lack of enthusiasm—from traditionally dominant institutions, who pointed to potential dangers of moral hazard. It is in this connection that the proposals by China (the Asian Infrastructure Investment Bank, AIIB) and the BRICS countries (the New Development Bank, NDB) are so interesting. These initiatives are grounded in the massive foreign-exchange reserves of China, totaling over $3 trillion when the proposals were formally made and supported by over $1.3 trillion in Chinese sovereign wealth funds and informal reserves.72 Yet they also involve substantial cooperation from outside China, which will be crucial to the ultimate success of the BRI, given the ambitiousness of its developmental goals.

These investment vehicles include the China-Central and Eastern Europe Investment Fund (November 2013), cosponsored by the ­Export-Import Bank of China and the Hungarian Export-Import Bank, as well as the Russia-China RMB Cooperation Fund ( July 2017), jointly funded by the China Development Bank and the Russian Direct Investment Fund.19 The two conspicuous risks that the Chinese state-dominated financial system presents to global finance are the converse of its strengths. The system is, precisely because it is a creature of the Chinese state, vulnerable to moral hazard. Japan saw the consequences of such a system in the late 1990s, amid the Asian financial crisis, after its administered credit system was opened to the world. For related structural reasons, the contemporary Chinese financial system is not good at credit assessment—a problem sometimes compounded by political pressures for problematic lending, both within China and in host nations.

A Response to BRI The US desperately needs, in particular, a response to the panoply of Chinadominated development finance institutions established since 2014, including the Silk Road Fund. Such a response must capitalize on fundamental insights of other development-finance institutions, while avoiding weaknesses of the statist Chinese approach, such as moral hazard and inadequate risk-assessment mechanisms. “Distributive globalism,” for all its defects, is a powerful if seductive tool for appealing to recipient nations, especially those with pressing infrastructural needs, that needs to be countered in kind. In February 2018 there was a start.28 Eight US Senators, together with colleagues in the House of Representatives, introduced legislation on a bipartisan 250 chapter 11 basis to establish a United States International Development Finance Corporation (USIDFC).


pages: 601 words: 135,202

Limitless: The Federal Reserve Takes on a New Age of Crisis by Jeanna Smialek

Alan Greenspan, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Sanders, bitcoin, Black Lives Matter, blockchain, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, Colonization of Mars, coronavirus, COVID-19, crowdsourcing, cryptocurrency, decarbonisation, distributed ledger, Donald Trump, Fall of the Berlin Wall, fiat currency, financial engineering, financial innovation, financial intermediation, Fractional reserve banking, full employment, George Akerlof, George Floyd, Glass-Steagall Act, global pandemic, Henri Poincaré, housing crisis, income inequality, inflation targeting, junk bonds, laissez-faire capitalism, light touch regulation, lockdown, low interest rates, margin call, market bubble, market clearing, meme stock, Modern Monetary Theory, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Nixon shock, offshore financial centre, paradox of thrift, price stability, quantitative easing, race to the bottom, risk tolerance, Robinhood: mobile stock trading app, Ronald Reagan, secular stagnation, short squeeze, social distancing, sovereign wealth fund, The Great Moderation, too big to fail, trade route, Tragedy of the Commons, working-age population, yield curve

They built on playbooks that other central banks had written: The Bank of England’s financial rescues in the mid-1800s set an example that central banks had followed since,[17] and the Bank of Japan had been carrying out massive asset purchases since 2001.[18] But because the United States had the deepest capital markets in the world—and because the Fed, as the steward of those markets and the powerful currency backing them, held such massive sway—the wide-ranging rescue sent a critical message to investors. If a market, asset class, or financial institution was important to the soundness of the overall system, the U.S. government would swoop in to fix things. That implicit backstop, called moral hazard, became an angry buzzword on Capitol Hill after 2008 and 2009. Some lawmakers, economists, and interest groups were livid that Wall Street had received a huge helping hand, and others were mad that the government had interfered in the working of the market. Indictments of crisis policies won clicks on the internet and scored political points, but they often failed to address what should have happened instead.

But where Eccles had become a Keynesian before the word even existed, Quarles remained a steadfast devotee of free market capitalism, albeit a version that came with guardrails. He wanted to create a transparent system in which companies could understand regulations and pursue profits within clear-cut guidelines. He laid out his philosophy especially clearly in a 2010 law article, in which he argued that “governments can limit both moral hazard and uncertainty by refraining from intervention when possible and, when action of some sort is inherent in the government’s mandate (as in issuing debt or executing monetary policy), by developing and sticking to clear, predictable rules for action, thus putting boundaries on what decisions can result from a weighing of the pros and cons.”[16] Basically, he did not want bureaucrats to get in capitalists’ way.

., 74, 76–8, 81, 108 masks and face coverings, 219, 222–3 McAdoo, William, 59–60 McCabe, Thomas, 72–4 McConnell, Mitch, 138, 178, 179, 191, 192, 251–2, 267 McFadden Act, 62 meme stocks, 274, 291–2 Mester, Loretta, 154n Metropolitan Club, 11, 333n1 Mexico, 139, 145, 197, 266, 334n11 Missouri, 59 Mnuchin, Steven: allocation of money for programs, 192, 199, 208, 211, 213, 247–8, 251–2, 253–62, 347n10; background, education, and expertise of, 140–1, 170, 192–4; character and personal style of, 140, 141, 192–5; confirmation hearing of, 193–4; deregulation under, 104, 169; economic ideology of, 256–7, 294; Group of Seven call by, 142, 143; January 6 riots and loyalty to Trump, 281n; junk bond–buying discussion with Powell, 210; pandemic rescue program role of, 161–2, 165, 175–81, 183–4, 188–9, 191–5, 199, 205, 206–7, 208, 212, 214, 251–2, 345n25; planning response to pandemic with Powell, 139–40, 141; post-government career of, 298–9; Powell firing threat from, 107; relationship with Powell, 139–40, 141; role in selection of Powell, 20–1; Treasury secretary role of, 104, 192–5; 2020 presidential election and continuation of pandemic relief efforts, 253–62, 263; wealth of, 140, 298–9 monetary policy: economic slowdown and, 108–10, 111–16, 341n9; Fed Listens outreach events on, 22–3, 27–8; financial crisis of 2008 and, 4–5, 24–6, 90–8; full employment and, 22, 77–8, 80, 96–7, 97n, 101, 233–4, 239–44, 250; inscrutability of, 23, 23n; interest rates, economic trends, and, 111–16; modern monetary theory and inflation, 351n1; pandemic and, 4–5, 29–35, 38–41, 238–43; Powell role in as Fed governor, 17–18, 129; review of under Powell, 21–2; Taylor rule, 341n22; voting on by Fed governors and regional bank presidents, 13, 13n, 130 money/currency: Bretton Woods system and linking dollars to gold, 75–6; cash supply and flow management by Fed, 3, 12–13; cash supply and withdrawals at start of pandemic, 39–40, 335n10; concept and history of, 44–6, 335nn11–12; control over by Fed and political goals, 8–9; creation by Fed, 5; creation of during pandemic, 4, 176, 185–6; Federal Reserve note, 57; fiat currency, 48–50, 272; global financial system with dollar at core of, 75–6, 82, 196–8; greenback currency, 48–50; impact of pandemic on currency markets, 141; money supply as driver of economic outcomes, 79–80; national bank notes, 48, 53; pandemic and role of the dollar in global finance, 196–8; specie, 49, 335n11. See also digital currency money market mutual funds and rescue program, 31, 103, 147–9, 151, 157, 163, 171, 182–3, 208, 216, 238, 292–3 money printer memes and paraphernalia, 185–6 Money Trust, 56 moral hazard, 94, 120 Morgan, John Pierpont, 52–4, 53n, 54n, 56, 60–1, 66 Morgan Stanley, 155–6, 157, 169 Morse, Charles, 52 mortgage debt. See housing market and mortgage debt Mulvaney, Mick, 107, 222 municipal/state and local government bonds, 152, 167–8, 207–9, 211, 213, 237–8, 248, 258–9, 294, 350n10, 350n31 N national bank notes, 48, 53 National Reserve Bank of Washington, 58 Network for Greening the Financial System (NGFS), 266–7, 269–70, 270n New Deal, 67 news conferences.


Basic Income And The Left by henningmeyer

basic income, Bernie Sanders, carbon tax, centre right, eurozone crisis, income inequality, Jeremy Corbyn, John Maynard Keynes: technological unemployment, labour market flexibility, land value tax, means of production, mini-job, moral hazard, precariat, quantitative easing, Silicon Valley, technological determinism, the market place, Tobin tax, universal basic income

Hence, Anthony Atkinson’s concern about This takes me back to concerns raised by Lister. I do contribution, which Lister reiterates, is important, not see a basic income – as idea or practice – as a but direct conditionalities may not be the best solu‐ challenge to the work ethic. The mistake lies in tion, because these risk generating moral hazard and thinking this is the job of the basic income in the costly measurement problems. Atkinson tried to first place. It is this line of thinking that needs to be solve too many objectives in one single policy. In challenged. Why reproduce the problematic assump‐ Policy and Politics and Basic Income Studies I argued tion that people will not work if they have basic there is no principled or indeed practical reasons to security?


pages: 306 words: 82,765

Skin in the Game: Hidden Asymmetries in Daily Life by Nassim Nicholas Taleb

anti-fragile, availability heuristic, behavioural economics, Benoit Mandelbrot, Bernie Madoff, Black Swan, Brownian motion, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, cellular automata, Claude Shannon: information theory, cognitive dissonance, complexity theory, data science, David Graeber, disintermediation, Donald Trump, Edward Thorp, equity premium, fake news, financial independence, information asymmetry, invisible hand, knowledge economy, loss aversion, mandelbrot fractal, Mark Spitznagel, mental accounting, microbiome, mirror neurons, moral hazard, Murray Gell-Mann, offshore financial centre, p-value, Paradox of Choice, Paul Samuelson, Ponzi scheme, power law, precautionary principle, price mechanism, principal–agent problem, public intellectual, Ralph Nader, random walk, rent-seeking, Richard Feynman, Richard Thaler, Ronald Coase, Ronald Reagan, Rory Sutherland, Rupert Read, Silicon Valley, Social Justice Warrior, Steven Pinker, stochastic process, survivorship bias, systematic bias, tail risk, TED Talk, The Nature of the Firm, Tragedy of the Commons, transaction costs, urban planning, Yogi Berra

While I lean towards virtue ethics, virtue for its own sake, for existential reasons, my co-author Constantine Sandis and I found, thanks to On What Matters by Derek Parfit (2011), who considers them all to be climbing different sides of the same mountain, that skin in the game falls at the convergence point of three main ethical systems: Kantian imperatives, consequentialism, and classical virtue. Principal-agent and moral hazard in economics: Ross (1973), Pratt et al. (1985), Stiglitz (1988), Tirole (1988), Hölmstrom (1979), Grossman and Hart (1983) Islamic decision making under uncertainty: Unpublished manuscript by Farid Karkabi, Karkabi (2017), Wardé (2010). Al ġurm fil jurm is the main concept. Eye for Eye not literal: The discussion in Aramaic that when a small man harms a big man, there is no equivalence, is mistranslated.

“Homo Heuristicus: Why Biased Minds Make Better Inferences.” Topics in Cognitive Science 1(1): 107–143. Grossman, S. J., and O. D. Hart, 1983. “An Analysis of the Principal-Agent Problem.” Econometrica, 7–45. Halbertal, Moshe, 2012. On Sacrifice. Princeton, N.J.: Princeton University Press. Hölmstrom, B., 1979. “Moral Hazard and Observability.” The Bell Journal of Economics, 74–91. Isocrates, 1980. Three volumes. Loeb Classical Library, Harvard University Press. Karkaby, Farid, 2017. “Islamic Finance: A Primer.” Unpublished manuscript. Kelly, J. L., 1956. “A New Interpretation of Information Rate.” IRE Transactions on Information Theory 2(3): 185–189.


pages: 303 words: 83,564

Exodus: How Migration Is Changing Our World by Paul Collier

Ayatollah Khomeini, Boris Johnson, charter city, classic study, Edward Glaeser, experimental economics, first-past-the-post, full employment, game design, George Akerlof, global village, guest worker program, illegal immigration, income inequality, informal economy, language acquisition, mass immigration, mirror neurons, moral hazard, open borders, radical decentralization, risk/return, Silicon Valley, sovereign wealth fund, Steven Pinker, tacit knowledge, The Wealth of Nations by Adam Smith, transaction costs, University of East Anglia, white flight, zero-sum game

Entrepreneurs sell people places on small boats bound for Australian territory. The results are tragically predictable. The people who buy illegal passage have no recourse against deceit and incompetence: boats sink and people drown. A debate is currently raging in Australia as to how far the duty of rescue should extend. An evident dilemma is what economists coyly term “moral hazard”: if getting on a leaky boat puts someone in a position where they have to be rescued by being given residency in Australia, then many more people will get on leaky boats. The duty of rescue can be abused. This does not release Australians from the duty of rescue: by its nature, this is a duty without an escape clause.

See also under specific countries anti-migration approach to, 136–137 “anxiety phase” of, 140–141 asylum and, 160, 249, 262–263 businesses’ role in, 262 ceilings and, 256–260, 267–268 culturally differentiated controls and, 262 diaspora absorption phase of, 142 education requirements and, 12, 157–158, 164–165, 212–213, 252, 261 emotive perspective on, 11–12 family reunification and, 158–159, 164–165, 212–213, 260 integration and, 264–265, 270 legalizing illegal immigration and, 265–267 lotteries and, 147, 165–166, 259, 261 migration rates and, 50–51, 91, 142, 166, 244, 251–252, 254–260, 268–269, 272 “panic” approach to, 141, 255–256, 267–270 pro-migration approach to, 136 quantitative limits approach to, 139–141 right to control immigration and, 246–251, 270 selectivity and, 260–263 “ugly phase” of, 141 wealth requirements and, 121 Miguel, Edward, 67–68, 76 Mo Ibrahim Index, 193 Moldova, 187 Montalvo, Jose, 77, 98, 191 moral hazard, 249–250 moral values. See ethical values motivation drain, 203–206 Mozambique, 200 Mugabe, Robert, 182, 191 multiculturalism critiques of, 35 as cultural fusion, 97, 99–100, 264 cultural separatism and, 100, 106 impact on integration rates and, 107, 109 impact on language acquisition and, 107 liberalism and, 97, 272 as reaction to assimilation narrative, 97 mutual regard citizenship and, 115–116 cooperation and, 62–63, 67, 83, 87 diminishing returns from, 63, 254 economic redistribution and, 61–62, 68, 83–84, 87, 113, 254 migrants and, 72–73 migration’s impact on, 135–136, 254, 258 neurological foundations of, 234 Smith on, 234 trust and, 62, 254 narratives, Keynes on, 30, 198 National Health Service (NHS, Great Britain), 62, 126, 238 national identity criticisms of, 5, 16–18, 231 economic redistribution and, 18, 235–237 migration’s impact on, 242–244 positive aspects of, 5, 18–19, 25, 131, 242 public sector workers and, 238 racism and, 241 sense of community and, 232, 234–242 violence and, 19, 237, 240–241 Netherlands, 24, 118, 129, 137 neuroscience, 71, 234 New York City (United States) diplomats case study in, 67–68 premier public schools in, 119–120 New Zealand businesses’ role in migration to, 262 migration example featuring, 44–48 migration from Tonga to, 147, 172–173, 259 migration policy in, 128, 147, 173 Niger, 163 Nigeria levels of trust in, 65–66, 68 migrants from, 67–69 terrorism in, 222–223 Norway, 16, 19, 240 Notting Hill Carnival (Great Britain), 82–83 Nunn, Nathan, 65 Nyerere, Julius, 5, 239–240 Okonjo-Iweala, Ngozi, 191 “outsider values,” 203–206, 238 Outtarra, Alassane, 191 Palestinian territories, Jewish settlement in, 93 Paris (France), 216 Philippines, 208, 210–211 Pinker, Steven, 6, 31–32, 65, 80, 233, 240 Plundered Planet, The (Collier), 184, 202 Poland European Union and, 20 Germany and, 240 migration to Great Britain and, 20–21, 262 poor countries.


pages: 353 words: 81,436

Buying Time: The Delayed Crisis of Democratic Capitalism by Wolfgang Streeck

"there is no alternative" (TINA), "World Economic Forum" Davos, activist fund / activist shareholder / activist investor, air traffic controllers' union, Alan Greenspan, banking crisis, basic income, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collective bargaining, corporate governance, creative destruction, currency risk, David Graeber, deindustrialization, Deng Xiaoping, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial repression, fixed income, full employment, Garrett Hardin, Gini coefficient, Growth in a Time of Debt, income inequality, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, labour mobility, late capitalism, liberal capitalism, low interest rates, means of production, moral hazard, Myron Scholes, Occupy movement, open borders, open economy, Plutonomy: Buying Luxury, Explaining Global Imbalances, profit maximization, risk tolerance, shareholder value, too big to fail, Tragedy of the Commons, union organizing, winner-take-all economy, Wolfgang Streeck

Social justice is material, not formal, in nature – and so it cannot but appear irrational, arbitrary and unpredictable in terms of the formal rationality of the market.25 Politics, to the extent that it is driven by demands for social justice, therefore confuses the market process, muddies its outcomes, creates false incentives and ‘moral hazards’, undermines the performance principle and is generally alien to the ‘business world’. On the other hand, from the point of view of social justice, the ‘democratic class struggle’26 is an indispensable corrective in a system which, resting upon unequal contracts between wage-earners and profit-makers, gives rise to a cumulative advantage in line with what has been called the Matthew principle: ‘For to all those who have, more will be given, and they will have an abundance; but from those who have nothing, even what they have will be taken away’ (Matt. 25:29).

Of course, a country’s debts are always financed or refinanced in tranches, so that it takes a while before an increase in interest rate applies to such a large part of its total debt that the possibility of a default becomes acute. It cannot be in the creditors’ interest to see that situation arise, since it would kill the goose that lays their golden egg – unless, of course, they can count on another stepping into the breach. Obviously this would create a ‘moral hazard’ if ever there was one. 78 To be sure, one does not know exactly how the financial institutions of various countries are intertwined with one another. So-called stress tests, precisely if administered by international organizations, may tell us nothing about this: first, because they can only use data collected and passed on by national supervisory bodies; and second, because they have to be organized in such a way that, even in the worst of cases, their results do not cause panic. 79 For more on this, see the discussion in Chapter 3 on the European Union as an international ‘consolidation state’. 80 In the social sciences, this perspective is cultivated by comparative policy research that nearly always has agonistic undertones.


pages: 262 words: 83,548

The End of Growth by Jeff Rubin

Alan Greenspan, Anthropocene, Ayatollah Khomeini, Bakken shale, banking crisis, Bear Stearns, Berlin Wall, British Empire, business cycle, call centre, carbon credits, carbon footprint, carbon tax, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, deal flow, decarbonisation, deglobalization, Easter island, energy security, eurozone crisis, Exxon Valdez, Eyjafjallajökull, Fall of the Berlin Wall, fiat currency, flex fuel, Ford Model T, full employment, ghettoisation, Glass-Steagall Act, global supply chain, Hans Island, happiness index / gross national happiness, housing crisis, hydraulic fracturing, illegal immigration, income per capita, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, Jevons paradox, Kickstarter, low interest rates, McMansion, megaproject, Monroe Doctrine, moral hazard, new economy, Occupy movement, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, proprietary trading, quantitative easing, race to the bottom, reserve currency, rolling blackouts, Ronald Reagan, South China Sea, sovereign wealth fund, subprime mortgage crisis, The Chicago School, The Death and Life of Great American Cities, Thomas Malthus, Thorstein Veblen, too big to fail, traumatic brain injury, uranium enrichment, urban planning, urban sprawl, women in the workforce, working poor, Yom Kippur War, zero-sum game

Big agencies such as Standard & Poor’s, Moody’s and Fitch have a vested interest in keeping the folks who pay the bills happy. In economics we use the term moral hazard to describe a situation in which the interests of two parties entering into an agreement aren’t aligned. The way debt rating agencies are compensated, they have an incentive to hand out generous ratings while at the same time they’re insulated from the negative consequences of being wrong. That’s a dangerous combination. Investment bankers will tell you that steering clear of moral hazard requires keeping your head up and your eyes open. When the housing market crashed, CIBC and other financial institutions were caught skating across the ice with their heads down.


pages: 265 words: 80,510

The Enablers: How the West Supports Kleptocrats and Corruption - Endangering Our Democracy by Frank Vogl

"World Economic Forum" Davos, active measures, Alan Greenspan, Asian financial crisis, bank run, Bear Stearns, Bernie Sanders, blood diamond, Brexit referendum, Carmen Reinhart, centre right, corporate governance, COVID-19, crony capitalism, cryptocurrency, Donald Trump, F. W. de Klerk, failed state, Global Witness, Greensill Capital, income inequality, information security, joint-stock company, London Interbank Offered Rate, Londongrad, low interest rates, market clearing, military-industrial complex, moral hazard, Nelson Mandela, offshore financial centre, oil shale / tar sands, profit maximization, quantitative easing, Renaissance Technologies, Silicon Valley, Silicon Valley startup, stock buybacks, too big to fail, WikiLeaks

Vladimir Putin is probably not the only kleptocrat who takes the cynical view, according to author and journalist Catherine Belton, “that anyone in the West could be bought, and that commercial imperatives would always outweigh any moral or other concerns.”1 Issues of ethics and finance are not new, and history provides a warning. For a short period, the city-state of Siena in Italy was Europe’s leading banking center. The nine eminent councilors of Siena were concerned about the moral hazards of grand finance, and they turned to artist Ambrogio Lorenzetti to commission great murals for the city’s opulent council chamber. Between February 1338 and May 1339, Lorenzetti painted three adjoining large frescoes titled The Allegory of Good and Bad Government. The frescoes remain on show today, although it was not long after their completion that Siena fell on hard times, first with the Black Death plague of 1348 and soon thereafter with a major financial scandal.

At the same time, and in vain, these creditor governments have called on private lenders to provide debt moratoriums of their own. Borrowing governments, however, have not encouraged this for fear this might reduce their credit standing and reputations in the international markets. The bottom line and the moral hazard is that everyone knows that to avoid a global crisis, the IMF will ride to the rescue. The IMF has been providing emergency loans to debtor nations without any policy conditions or real-time monitoring since mid-2020 following the outbreak of the pandemic. The resources of the IMF were boosted by the United States and the other major IMF shareholders in mid-2021 so that it can provide hundreds of billions of additional dollars to debtor nations.


pages: 361 words: 86,921

The End of Medicine: How Silicon Valley (And Naked Mice) Will Reboot Your Doctor by Andy Kessler

airport security, Andy Kessler, Bear Stearns, bioinformatics, Buckminster Fuller, call centre, Dean Kamen, digital divide, El Camino Real, employer provided health coverage, full employment, George Gilder, global rebalancing, Law of Accelerating Returns, low earth orbit, Metcalfe’s law, moral hazard, Network effects, off-the-grid, pattern recognition, personalized medicine, phenotype, Ray Kurzweil, Richard Feynman, Sand Hill Road, Silicon Valley, stem cell, Steve Jurvetson, vertical integration

If nothing shows up then, you can stop bothering. I’d start worrying about dying of something else.” Comforting. I could cross a heart attack off my list, but that left the Big C and a stroke still lurking. Still—good-bye, Egg Beaters; hello, rib eye. And cigars. And Scotch. Economists call this a moral hazard. I never liked economists anyway. But that’s it, isn’t it? Maybe the jig is up on the cholesterol conspiracy. Any real scientist running studies on cholesterol drugs would not just check to see if participants in the study had a heart attack. You would scan, check for plaque, provide drugs, scan again, see if the plaque increased or decreased, repeat.

I don’t know about you, but I’m not signing up for a life in a hospital bed with tubes flying all over the place and coffee enemas every Thursday. Free as a bird is more like it. Once imaging becomes mainstream, what kind of bizarre world will we be living in? “Come on in the family room and see a video of your uncle’s colon.” Or do we enter a world of moral hazards. “Philip Morris buys up all the patents for molecular imaging and sells cigarette packs with coupons. Collect 100 coupons and you get a free scan for lung cancer. Smoke until cancer shows up—then we’ll clean you up.” It’s sort of a modern version of smoking through your tracheotomy. Don’t knock it until you’ve tried it.


India's Long Road by Vijay Joshi

Affordable Care Act / Obamacare, barriers to entry, Basel III, basic income, blue-collar work, book value, Bretton Woods, business climate, capital controls, carbon tax, central bank independence, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, congestion charging, Cornelius Vanderbilt, 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, foreign exchange controls, 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, low interest rates, Mahatma Gandhi, manufacturing employment, Martin Wolf, means of production, microcredit, moral hazard, obamacare, Pareto efficiency, price elasticity of demand, 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, Tragedy of the Commons, transaction costs, universal basic income, urban sprawl, vertical integration, working-age population

(Equity considerations can be handled by state subsidies to pay the insurance premiums of poor people.) Another cause of the failure of insurance markets is ‘moral hazard’, the tendency of insurance to change the behaviour of the insured in ways that are hard to monitor. With insurance, people do not have to bear the full cost of treatment, so they have an incentive to take fewer health precautions. (However, the incidence of this problem can be exaggerated in the field of secondary care since many of the conditions that are insured against are unpleasant enough to offset the moral hazard effect.) More importantly, since insurance is paid by a third party, there is a tendency for patients to demand, and health providers to supply, unnecessary care and more expensive care, which leads to cost and price escalation.

More importantly, since insurance is paid by a third party, there is a tendency for patients to demand, and health providers to supply, unnecessary care and more expensive care, which leads to cost and price escalation. Moral hazard cannot be addressed by state intervention. But adverse selection constitutes by itself a sufficient ground for the state to step in and regulate the insurance market. Countries differ in their response to market failures in health care. The UK and Southern European countries have mostly chosen to deliver health services through a national health service. This is, in effect, a combination of in-​kind universal state insurance with state provision of care; private health insurance and provision are only voluntary add-​ons.


Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, book value, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, Cornelius Vanderbilt, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, flying shuttle, Glass-Steagall Act, Gordon Gekko, Henri Poincaré, Henry Singleton, high net worth, impact investing, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, John Bogle, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, margin call, means of production, Menlo Park, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Performance of Mutual Funds in the Period, Ponzi scheme, Post-Keynesian economics, price mechanism, principal–agent problem, profit maximization, proprietary trading, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Sand Hill Road, Savings and loan crisis, seminal paper, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, tail risk, technology bubble, Teledyne, The Wealth of Nations by Adam Smith, time value of money, tontine, too big to fail, transaction costs, two and twenty, underbanked, Vanguard fund, working poor, yield curve

The ultimate effect of the bank bailouts during the Great Recession has been to introduce an essential and oft-discussed question: have banks become too big to fail? The concept of too big to fail is problematic for two reasons. The first is that if true, moral hazard may arise whereby exceptionally large institutions take on more risk than is prudent, thinking there will be a bailout in case the risk taking results in outsized losses. In particular, has the offering of bank bailouts to exceptionally large institutions altered their behavior in a way that has created moral hazard? Will banks now engage in risky practices in the belief that their risk is now limited by the federal government’s safety net? The second reason is that a bank bailout can create an unfair divergence in capital access between small and large institutions.

., 214 Mises, Ludwig von, 205 Mitchell, Charles, 164 Mit Ghamr Savings Bank, 38 Modigliani, Franco, 121–22, 233 Moley, Raymond, 211 momentum investing strategies, 314 monetarist school, 206–7, 212 428 Investment: A History Monetary History of the United States, 1867–1960, A (Friedman and Schwartz), 206 money: Aristotle on, 33, 59; expanding supply of, 176; sterility of, 23; time value of, 32 moneylenders (doso), 31 money market mutual funds, 143 Monte, 83 moral hazard, 219 Mores, Edward Rowe, 132 Morgan Stanley, 294 Morgenthau, Henry, 209–10 mortality risk, 132, 145 mortgages, 321–23; insurance, 321; mortgage-backed securities, 217, 266, 323; mortgage debt, highly rated tranches of, 224; subprime-mortgage lending, 223 mudaraba contract, 35, 53, 55 mufawada contract, 55 Muhammad, 37 Murlyn Corporation, 190 Murphy, Thomas, 7 Muscovy Company, 65–66 musharaka contract, 53 Muth, Richard, 207 mutual funds, 139–44; closedend, 140, 141; 401(k) and, 144; Great Depression and open-ended, 141–42; industry today, 144; money market, 143; opportunities with, 92; during postwar period, 142–44; precursors to, 140; in retirement accounts, 295; shares through, 93 mutual life insurance companies, 133–34 mutual savings banks, 134–37 Napoleon, 74 Napoleonic Wars, 87 naruqqum investment partnerships, 52 Nasser Social Bank, 38 National Conference of Commissioners on Uniform State Laws, 124 National Housing Act of 1934, 321–22 national or international exchange, 94 National School Lunch Program, 167 National Venture Capital Association (NVCA), 278 Natomas Company, 186 natural catastrophe, 332; raising funds by selling, 162; “safe,” 1; selling and purchasing, 165; Treasury, 252 natural resources, commodities and, 281–82 NBC Reports, 111 Needham & Co., 187 negotiable bills of exchange, 83–84 nemulum (net profit), 52 net present value (NPV), 231–32 net profit (nemulum), 52 new asset classes, 331–32 New Deal, 92, 108, 109 new elite, 10, 291, 304–5, 315, 318 New World, 65, 69 New York Curb Market Agency, 89, 97 New York Life, 102 New York Stock Exchange (NYSE), 88, 191; closure of, 203; mergers and transformations, 95; “Own Your Share of American Business” campaign, 92; stock ticker network, 95; trading Index 429 volume, 89, 90; Whitney, R., and, 164–67 New York Stock Exchange Gratuity Fund, 165 New York Yacht Club, 165 Nicostratus, 24 no-arbitrage condition, 235–36 Nomos Nautikos, 52 nonnegotiable bills of exchange, 83 Norman, Montagu, 202 Nourse, Edwin, 207 NPV.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, bond market vigilante , book value, borderless world, Bretton Woods, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, capital controls, Carl Icahn, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, disinformation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, Glass-Steagall Act, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, junk bonds, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, long and variable lags, Louis Bachelier, low interest rates, market bubble, Mexican peso crisis / tequila crisis, Michael Milken, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, planned obsolescence, plutocrats, Post-Keynesian economics, price mechanism, price stability, prisoner's dilemma, profit maximization, proprietary trading, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Savings and loan crisis, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, stock buybacks, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

It used to be said that nobody got rich in the thrift industry and nobody went bust; during the freeplay of the 1980s, people did both. Conservatives love to point to the web of perverse incentives that spaw^ned the affair. Deposit insurance removed all incentive for depositors to scrutinize the thrift's portfolio (a situation bankers and their friends call "moral hazard"). The mutual structure reinforced this, since individual depositor-shareholders have neither time nor interest nor expertise to scrutinize management. Abolish deposit insurance, said the right radicals, or rein it in, said the centrists. Of course, without deposit insurance, the entire financial system would probably have collapsed in a climactic run sometime between 1987 and 1990.

Economists have their own understanding. Thrift pundit Robert Litan (1992) rejected popular explanations of the crisis, which center on "venality, greed and incompetence," out of professional discomfort. Instead, Litan preferred the terrain of conventional economics — inflation, interest rate volatility, moral hazard, real estate slump, and the rest — and, like a loyal economist, was eager to get deregulation off the hook. PLAYERS Of course inflation and the rest are to blame. But it would be impoverishing to stop there. Litan's fellow economists assured us that financial deregulation was supposed to release untold energies by liberating the self-adjusting mechanisms of the capital markets.

Michael, 311 monetarism, 137, 191, 199-202 empirical record, 201-202, 242 part of the apparatus of crackdown, 201 ■Volcker's faux, 201 Walters' outburst, 242 monetary crank, 2^3 monetary policy, q theory and, 144-145; see also central banks; Federal Reserve monetary theory of production, 199, 231 money coercive aspects, 232 and crisis Keynes, 202-205 Marx, 232-236 definitions, 191 economists' treatment of, 10 endogenous, 200, 217-221 Marx on, 220-221 political implications, 220 see also post-Keynesianism exogenous, 217 face of the boss, 301 vs. finance, 183 in formation of capitalism as system, 245 as general wealth (Marx), 233 as a kind of poetry, 224 local, 302 neutrality of. 137 classical position, 199 and Greenspan, 158 how finance matters, 153-161 origin of term, 199 as object of greed, 236 political struggle over definition, 93-94 and power, 11 psychology of, 224—229 anal roots, 225-226 ascetic cultism, 224-225 interest rate effects on sentiment, 119 Marx and, 236-237 mob psychology, 176-177, 185 goldbugs, 244 refusing, 320 reticence about, 52 rule of, 232 ending, 321 smart vs. dumb, 53 as social bond (Marx), 231 ultimately a state thing, 232 velocity of, 191 money-center banks, 82 money managers damning self-evaluation, 291 get others to save for them, 239 poor performance of, 3, 165 Monks, Robert, 293, 299 Monthly Review. 230, 261 Moore, Basil, 218 moral hazard, 88 moralizing, 70 Morgan,J.P.,82, 93, 260 Morgan 0?) Bank, 262, 265, 277 Morgan Stanley, 83, 263, 271 mortgage debt, 63 Mullin.John, 125 Municipal Assistance Corp., 295 municipal bonds, 26-27 mutual funds, 7, 84 gain in market share, 81 shyness in governance issues, 291 mutual savings banks, 86 naked shorts, 31 Nasdaq, 12, 19-22 hires Nobelist to defend itself, 182 National As.sociation of Community Development Loan Funds, 312 National Association of Securities Dealers (NASD), 19; see also Nasdaq National City Bank of New 'Vork, 261; see also Citibank national income and product accounts (NIPA), 56, 189-190 "natural" in social sciences, 242 nature, costs of LBOs to, 274 necessitous borrowing, 65 Neff.


pages: 665 words: 146,542

Money: 5,000 Years of Debt and Power by Michel Aglietta

accelerated depreciation, Alan Greenspan, bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, circular economy, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, land bank, liquidity trap, low interest rates, margin call, means of production, Money creation, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, precautionary principle, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, Suez crisis 1956, the payments system, the scientific method, tontine, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

This involves a violation of the logic of the market, since private engagements are suspended by a sovereign decision and not deferred in time by contractual means. At the same time, the market is perpetuated, because this suspension preserves other private engagements that are healthy but cannot be honoured on account of the external repercussions of those other failed engagements. This intervention involves a certain moral hazard, for it unbinds social cost from private cost. This is why Bagehot achieved a tour de force in providing a doctrine that applies to what are necessarily exceptional situations. The general principles of Bagehot’s doctrine are as follows. The loan of last resort must not have lasting consequences that could endanger the monetary order, which is to say, which could threaten the unshakeable confidence in the gold convertibility of the bills issued by the Bank of England in normal times.

Moreover, the loan of last resort should be accorded at penalty rates in order to discourage borrowers from taking recourse to such loans when other sources of liquidity are still available to them. This penalty rate is also justified by the risk the Bank is taking, in that it has to cover the potential losses inherent to accepting collaterals at their pre-crisis values. The last recommendation concerns credibility. Assuring public confidence while containing moral hazard demands that the Bank announce its principles in advance and then strictly abide by them. The Bank did this very effectively. In striking contrast to what happened in the United States – a country which did not at that time have any central bank – in the United Kingdom the major financial crises of 1878, 1890 and 1907 did not degenerate into generalised panics.

International regimes can thus help states to anticipate a narrower range of behaviours, now that states have adhered to a common higher principle. Finally, the close links between the governments and officials of the partner countries in handling these procedures encourage expectations of good faith. There is thus less of a disruptive effect from moral hazard. Moreover, the reference to common principles establishes links between questions that otherwise belong to distinct domains. The expansion of the field of negotiations can bring about profitable agreements which would not have emerged if there were only fragmented and ad hoc negotiations covering a narrower terrain.


pages: 354 words: 92,470

Grave New World: The End of Globalization, the Return of History by Stephen D. King

"World Economic Forum" Davos, 9 dash line, Admiral Zheng, air freight, Alan Greenspan, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Sanders, bilateral investment treaty, bitcoin, blockchain, Bonfire of the Vanities, borderless world, Bretton Woods, Brexit referendum, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collateralized debt obligation, colonial rule, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, currency risk, David Ricardo: comparative advantage, debt deflation, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Snowden, eurozone crisis, facts on the ground, failed state, Fall of the Berlin Wall, falling living standards, floating exchange rates, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, global value chain, Global Witness, Great Leap Forward, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, Jeremy Corbyn, joint-stock company, Kickstarter, Long Term Capital Management, low interest rates, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, middle-income trap, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, plutocrats, post-truth, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Savings and loan crisis, Scramble for Africa, Second Machine Age, Skype, South China Sea, special drawing rights, technology bubble, The Great Moderation, The Market for Lemons, the market place, The Rise and Fall of American Growth, trade liberalization, trade route, Washington Consensus, WikiLeaks, Yom Kippur War, zero-sum game

As an emergency measure in direct response to the March meltdown, Congress agreed to offer insurance protection to each depositor up to a maximum of $2,500 ($44,800 in 2015 US dollars) in the hope that bank runs would be stymied. In July of the following year, the level of protection was raised to $5,000 ($89,000 in 2015 US dollars). The policy worked, to the extent that the financial system was stabilized and confidence returned. It also, however, introduced moral hazard. Thanks to deposit insurance, most depositors no longer had to worry about what their bank was up to: their money was safe, come what may. At a stroke, market discipline had been removed, largely because an increasing number of politicians, legislators and members of the public no longer thought markets were working for them.9 It marked a sea change in attitudes – one that was to prevail for the next 40 years.

In the event of a cross-border financial crisis in which savers walked away from a particular country, that country would have the right to appeal to GOFF. GOFF, in turn, would provide the troubled country with temporary funding – for a year or so – on better terms than those now prevailing in the capital markets (although, to limit moral hazard risks, on worse terms than had been on offer pre-crisis). Having provided the loan, GOFF would then attempt to assess precisely who was responsible for the underlying imbalance. If it turned out that the borrowing country was basically corrupt and had raised loans fraudulently, GOFF would end the funding and also deliver a downgraded credit rating.


The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance) by Feng Gu

active measures, Affordable Care Act / Obamacare, Alan Greenspan, barriers to entry, book value, business cycle, business process, buy and hold, carbon tax, Claude Shannon: information theory, Clayton Christensen, commoditize, conceptual framework, corporate governance, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, disruptive innovation, diversified portfolio, double entry bookkeeping, Exxon Valdez, financial engineering, financial innovation, fixed income, geopolitical risk, hydraulic fracturing, index fund, information asymmetry, intangible asset, inventory management, Joseph Schumpeter, junk bonds, Kenneth Arrow, knowledge economy, moral hazard, new economy, obamacare, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, race to the bottom, risk/return, Robert Shiller, Salesforce, shareholder value, Steve Jobs, tacit knowledge, The Great Moderation, value at risk

Competition, particularly in the consumer segment of the business is fierce, evidenced by the substantial amount spent by insurance companies on advertising (Geico’s gecko, Progressive’s Flo). There are several large but not dominant firms in the industry (State Farm, Geico, Allstate). Insurers face two major issues: in the economists’ parlance, adverse selection and moral hazard. The former refers to the tendency of individuals or companies with high risk (e.g., seriously ill people) to obtain more coverage than low-risk persons, and the latter refers to the tendency of the insured to engage in riskier behavior (neglect house maintenance) relative to uninsured, and, at the extreme, to fake claims.

Other strategic assets are brands (Allstate’s Esurance), intellectual property (patents on new products, like Snapshot, Progressive’s plugged-in-the-car device to track individual driving behavior and offer personalized premiums), and dedicated, productive agents. Back to customers. What are the “right” customers assuring sustained competitive advantage? These are persons with low adverse selection and moral hazard (defined earlier), namely, low-risk (safe drivers), and careful (property maintaining) customers. Successful strategy (referred to as book management) is aimed at targeting such customers (Hartford, for example, teamed Strategic Resources & Consequences Report: Case No. 2 149 up with AARP, the dominant retirees association, to market insurance to AARP members—older people are, on average, conscientious, low-mileage drivers, carefully maintaining their cars), and holding on to them as long as possible with attractive rates and good customer relations (claims management).


pages: 312 words: 91,835

Global Inequality: A New Approach for the Age of Globalization by Branko Milanovic

Asian financial crisis, assortative mating, Berlin Wall, bitcoin, Black Swan, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, centre right, colonial exploitation, colonial rule, David Ricardo: comparative advantage, deglobalization, demographic transition, Deng Xiaoping, discovery of the americas, European colonialism, Fall of the Berlin Wall, Francis Fukuyama: the end of history, full employment, Gini coefficient, Gunnar Myrdal, income inequality, income per capita, invisible hand, labor-force participation, liberal capitalism, low skilled workers, Martin Wolf, means of production, military-industrial complex, mittelstand, moral hazard, Nash equilibrium, offshore financial centre, oil shock, open borders, open immigration, Paul Samuelson, place-making, plutocrats, post scarcity, post-industrial society, profit motive, purchasing power parity, Ralph Nader, Robert Solow, Second Machine Age, seigniorage, Silicon Valley, Simon Kuznets, special economic zone, stakhanovite, trade route, transfer pricing, very high income, Vilfredo Pareto, Washington Consensus, women in the workforce

Differences in wealth and opportunity between countries are viewed as the product of the differences in choices made by nations: people in some nations, according to Rawls, decide to work and save more; those in other nations decide to work and save less: “if [a people] is not satisfied [with its wealth] it can continue to increase savings or … borrow from other members of the Society of Peoples” (p. 114).18 Those who are poorer have no claim on the income or wealth of the richer. Their claims cannot be a matter of justice (according to Rawls and other statists). If they really could lay a claim on richer societies’ income, whether in terms of redistribution or through a right to move there, we would run into a moral hazard problem, where some people would make irresponsible collective choices and then ask to share income acquired by those who were much more prudent or made better decisions. National self-determination, that is, decisions taken by a group of people who share a citizenship, would be meaningless in this case.19 It could additionally be argued that effort (which we cannot observe) is not the same across countries (that is, across individuals living in different countries).

Almost a century ago, the British economist Edwin Cannan, in his discussion of Adam Smith’s invisible hand, asked this question: “if … indeed, it [is] true that there is a natural coincidence between self-interest and the general good, why … does not this coincidence extend, as economic processes do, across national borders?”22 To maintain Rawls’s position, one must also show that national self-determination plays a fundamentally different role than individual “self-determination” does, that is, a person’s free will. For indeed the claim that redistribution within the nation-state may create a moral hazard problem because the poor may choose not to work is found wanting by Rawls in his Theory of Justice, but then in The Law of Peoples he invokes approvingly an almost identical claim to dismiss the argument for redistribution among nations. There is an unresolved tension between Rawls’s Theory of Justice, where, within a nation-state, the arguments against equality of opportunity are rejected through the ingenious invention of the veil of ignorance, and his Law of Peoples, where very similar arguments against equality of opportunity among global citizens are considered valid.


pages: 324 words: 90,253

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

Alan Greenspan, Albert Einstein, Apollo 11, Asian financial crisis, asset-backed security, banking crisis, Basel III, Bear Stearns, Berlin Wall, Bernie Madoff, bond market vigilante , British Empire, business cycle, 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, currency risk, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, Ford Model T, full employment, George Akerlof, German hyperinflation, Glass-Steagall Act, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, junk bonds, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, low interest rates, market clearing, mass immigration, Minsky moment, moral hazard, mortgage debt, Neil Armstrong, 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, risk free rate, Savings and loan crisis, seminal paper, 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

More was to follow: the 1990 recession was surprisingly mild, the 1994 collapse in the US Treasury market, when bond yields rose dramatically, was shrugged off with remarkable ease, the 1997 Asian crisis hardly registered beyond the – by now tiny – US manufacturing sector, the 2000 technology-related stock-market crash was followed by only the gentlest of recessions, while the recovery that followed seemingly confirmed that American policy-makers, in their collective wisdom, knew how to avoid a Japanese-style stagnation. Greenspan couldn't see the wolves of depression and stagnation hiding in the woods. Investors began to believe the world was safe. Unwittingly, however, policy-makers had created a huge moral hazard problem. If nothing could really go wrong – if recessions were now milder, inflation permanently lower and depression now only an artefact of economic history – it was worth taking more risk. The West's economic illusion was most obviously reflected in persistent increases in asset prices relative to the size of economies.

(i) Knickerbocker Trust Company (i) Korea (i), (ii), (iii), (iv), (v) Krugman, Paul (i), (ii), (iii) labour market (i), (ii) productivity (i) Landes, David (i) Latin American debt crisis (i) Layard, Richard (i), (ii) Lehman Brothers (i), (ii) Leveson inquiry (i) Libor (i) life expectancy (i) liquidity (i), (ii) liquidity trap (i) Liquidity Coverage Ratio (LCR) (i) Little Dorrit (Dickens) (i) living standards (i), (ii), (iii), (iv), (v) belief in ever rising (i), (ii) China (i) Indonesia (i) Japan (i) Korea (i) late 19th century (i), (ii) Malaysia (i) post-Second World War (i) US (i), (ii) loan-to-value ratios, mortgage (i) Long Depression (i) loss aversion (i) lotteries (i) Macroeconomic Imbalance Procedure (MIP) (i) macroeconomic policies (i), (ii), (iii), (iv), (v) Japan (i) macroprudential rules (i) Madoff, Bernie (i) Mahathir Mohamad (i), (ii) Malaysia (i), (ii), (iii) Malthus, Thomas (i) Manchester United (i) Marr, Wilhelm (i) Marx, Karl (i), (ii) Mary Poppins (i) May Report (i) Megawati Sukarnoputri (i) Mellon, Andrew (i), (ii) Mexico (i) Mieno, Yasushi (i) miners (i) Mississippi (i) mistrust creditors and debtors (i) cross-border (i) endemic (i) governments (i), (ii) of money (i) and political extremism (i) monetarism (i) monetary policy (i), (ii), (iii), (iv), (v), (vi) a new monetary framework (i) see also Gold Standard; interest rates; quantitative easing (QE) Monetary Policy Committee (i) monetary unions (i) see also eurozone moral hazard (i) mortgage-backed securities (i), (ii), (iii) mortgages (i), (ii) Napoleon Bonaparte (i) Napoleon III (i) National Bank of North America (i) national incomes (i), (ii), (iii), (iv) Germany (i) Japan (i) UK (i), (ii), (iii) US (i), (ii), (iii), (iv), (v) National Lottery (i) nationalism (i) the Netherlands (i) New Deal (i) ‘new economy’ of the 1990s (i) New Order (Indonesia) (i) New Zealand (i) Nicholson, Viv (i) Nigeria (i) Northern Rock (i), (ii), (iii), (iv) Norway (i) Occupy movement (i), (ii) Office for Budget Responsibility (i) Oliver Twist (Dickens) (i) Osborne, George (i) Overend, Gurney and Co.


pages: 209 words: 89,619

The Precariat: The New Dangerous Class by Guy Standing

8-hour work day, banking crisis, barriers to entry, basic income, behavioural economics, Bertrand Russell: In Praise of Idleness, bread and circuses, call centre, Cass Sunstein, centre right, collective bargaining, company town, corporate governance, crony capitalism, death from overwork, deindustrialization, deskilling, emotional labour, export processing zone, fear of failure, full employment, Herbert Marcuse, hiring and firing, Honoré de Balzac, housing crisis, illegal immigration, immigration reform, income inequality, independent contractor, information security, it's over 9,000, job polarisation, karōshi / gwarosa / guolaosi, labour market flexibility, labour mobility, land reform, libertarian paternalism, low skilled workers, lump of labour, marginal employment, Mark Zuckerberg, mass immigration, means of production, mini-job, moral hazard, Naomi Klein, nudge unit, old age dependency ratio, Panopticon Jeremy Bentham, pension time bomb, pensions crisis, placebo effect, post-industrial society, precariat, presumed consent, quantitative easing, remote working, rent-seeking, Richard Thaler, rising living standards, Ronald Coase, Ronald Reagan, science of happiness, shareholder value, Silicon Valley, technological determinism, The Market for Lemons, The Nature of the Firm, The Spirit Level, Tobin tax, transaction costs, universal basic income, unpaid internship, winner-take-all economy, working poor, working-age population, young professional

Unfortunately, in a utilitarian situation, the unfairness will be ignored or dismissed. A majority will be happy. The state is delegating job placement activities to commercial providers, paying them by the number of unemployed placed in jobs or by the measured reduction in claimant numbers. This commercialisation of what was once a public service sets up several moral hazards. It depersonalises to the point of making it neither a service nor public but merely a commodifying transaction. The intermediary is a firm, and in a market economy a firm exists with one overriding mandate, to make profits. Imagine the scenario. An agent wants a man put in a job quickly, to increase the agent’s own income.

In 2010, a development moving the United Kingdom towards a basic income came from what many would have thought an unlikely direction. The Coalition government’s plans for radical reform of the tax-benefit system recognised that the system of fifty-one benefits that the previous government had built up, many with different eligibility criteria, was befuddling and rife with moral hazards linked to poverty and unemployment traps. In amalgamating state benefits into two – a Universal Work Credit and a Universal Life Credit – it would have been possible to advance tax-benefit integration and facilitate a more orderly tapering of withdrawal of benefits as earned income rose. Integration could create the circumstances for a basic income to emerge.


Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accelerated depreciation, accounting loophole / creative accounting, Airbus A320, Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bear Stearns, Bernie Madoff, big-box store, Black Monday: stock market crash in 1987, Black-Scholes formula, Boeing 747, book value, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, capital controls, Carl Icahn, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, cross-subsidies, currency risk, discounted cash flows, disintermediation, diversified portfolio, Dutch auction, equity premium, equity risk premium, eurozone crisis, fear index, financial engineering, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, James Webb Space Telescope, junk bonds, Kenneth Rogoff, Larry Ellison, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, PalmPilot, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk free rate, risk tolerance, risk/return, Robert Shiller, Scaled Composites, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, Skype, SpaceShipOne, Steve Jobs, subprime mortgage crisis, sunk-cost fallacy, systematic bias, Tax Reform Act of 1986, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, vertical integration, yield curve, zero-coupon bond, zero-sum game, Zipcar

Insurers increase premiums to compensate or require the owners to share any losses. • Reason 3: Moral hazard. Two farmers met on the road to town. “George,” said one, “I was sorry to hear about your barn burning down.” “Shh,” replied the other, “that’s tomorrow night.” The story is an example of another problem for insurers, known as moral hazard. Once a risk has been insured, the owner may be less careful to take proper precautions against damage. Insurance companies are aware of this and factor it into their pricing. The extreme forms of adverse selection and moral hazard (like the fire in the farmer’s barn) are rarely encountered in professional corporate finance.

The oil company will not purposely scuttle the platform, but once insured it could be tempted to save on maintenance or structural reinforcements. Thus, the insurance company may end up paying for engineering studies or for a program to monitor maintenance. All these costs are rolled into the insurance premium. When the costs of administration, adverse selection, and moral hazard are small, insurance may be close to a zero-NPV transaction. When they are large, insurance is a costly way to protect against risk. Many insurance risks are jump risks; one day there is not a cloud on the horizon and the next day the hurricane hits. The risks can also be huge. For example, the attack on the World Trade Center on September 11, 2001, cost insurance companies about $36 billion, the Japanese tsunami involved payments of $35–$40 billion, and Hurricane Katrina cost insurers a record $66 billion.

Insurance companies specialize in assessing risks and can pool risks by holding a diversified portfolio of policies. Insurance works less well when policies are taken up by companies that are most at risk (adverse selection) or when the insured company is tempted to skip on maintenance or safety procedures (moral hazard). Firms can also hedge with options and with forward and futures contracts. A forward contract is an advance order to buy or sell an asset. The forward price is fixed today, but payment is not made until the delivery date at the end of the contract. Forward contracts traded on organized futures exchanges are called futures contracts.


The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

addicted to oil, air freight, airline deregulation, Alan Greenspan, Albert Einstein, asset-backed security, bank run, Berlin Wall, Black Monday: stock market crash in 1987, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, carbon tax, central bank independence, collateralized debt obligation, collective bargaining, compensation consultant, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, cotton gin, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, currency risk, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Glass-Steagall Act, Hernando de Soto, income inequality, income per capita, information security, invisible hand, Joseph Schumpeter, junk bonds, labor-force participation, laissez-faire capitalism, land reform, Long Term Capital Management, low interest rates, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, new economy, North Sea oil, oil shock, open economy, open immigration, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, Reminiscences of a Stock Operator, reserve currency, Right to Buy, risk tolerance, Robert Solow, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, special economic zone, stock buybacks, stocks for the long run, Suez crisis 1956, the payments system, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tipper Gore, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, We are all Keynesians now, working-age population, Y2K, zero-sum game

Studying the damage caused by Depression-era bank runs had led me to conclude that, on balance, deposit insurance is a positive.* Nonetheless, the presence of a government financial safety net undoubtedly fosters "moral hazard," the term used in the insurance business to describe why customers take actions they would not so readily consider were they not insured against the adverse consequences of their behavior. Regulations on lending and deposit taking hence must be carefully designed to minimize the moral hazard they inevitably create. Democracy requires trade-offs. I was delighted that being a regulator was not the burden I had feared. Of the hundreds of Board votes on regulation during my tenure, I found myself in the minority just once.

There was always the chance that a rescue this large would set a bad precedent: how many more times would investors pour money into willing but shaky economies, figuring that if they got into big enough trouble, the IMF would bail them out? This was a version of what the insurance industry calls the "moral hazard" of protecting individuals from risk. The bigger the safety net, the theory goes, the greater the recklessness with which people, businesses, or governments will tend to behave. Yet the consequences of allowing South Korea to default would have been worse, possibly far worse. A default by a nation of Korea's size would almost certainly have destabilized global markets.

(Herbert Greenspan), 21 Regan, Don, 9 2 - 9 3 , 98 regulation, 370-76, 388, 4 3 0 - 3 1 , 491-92 AG's rules of t h u m b for, 374-75 counterparty surveillance, 3 7 0 - 7 1 , 373, 489 economic future and, 467, 468, 4 8 9 - 9 3 , 502 government, 15, 256, 264-65, 273, 279, 280, 291,292,372-76,489,502 Reinhart, Vincent, 377 religion, 17, 140n, 252, 271, 272 Reminiscences of a Stock Operator (Lefevre), 28 Republicans, Republican Party, 58, 75, 86, 96, 1 1 1 13, 122, 148, 158, 208, 211, 221, 222, 2 3 3 ^ 8 , 504 budget surplus and, 184, 185 F O M C a n d , 152 Republic Steel, 45, 47 Reserve Bank of Australia, 292, 293 Resolution Trust Corporation (RTC), 116-17, 290 retirement, 174, 406, 409-22, 482, 504 age at, 413n defined-benefit pensions and, 419-22 extension of labor force participation vs., 411 ratio of dependent elderly to workers and, 409-10 see also Medicare; pensions, pension funds; Social Security Reuss, Henry, 70 Revolutionary War, 480 Reynolds, 49, 50 risk taking, risk, 140, 256, 272-73, 276, 356, 365, 434, 488-89, 492, 498, 503 aversion to, 17, 273, 360, 365 moral hazard and, 189 profits and, 3 6 8 - 7 0 Rivers, Larry, 27 Rivlin, Alice, 145, 162, 173, 176 Rockefeller, David, 8 1 , 84 Rockefeller, John D., 444, 449 Rockefeller, Nelson, 80 Rogers, John H., 361 n Roosa, Robert, 84 Roosevelt, Franklin Delano, 3 1 , 159, 246, 337, 431, 439 New Deal and, 2 1 , 30, 279, 504 Roosevelt, Theodore, 336 Roth, William, 92 Rove, Karl, 223 Royal Dutch Shell, 336, 339n, 438 Rubin, Robert, 7, 145, 146, 157-62, 170, 210, 220, 405 Asian contagion and, 188, 189-90, 195 budget surplus and, 185 Russian crisis and, 193 stock market and, 174-75, 179 Rubinomics, 161, 236 rule of law, 15, 16, 255-56, 297, 365, 396, 502 economic future and, 467, 468, 469-70, 503 in Europe, 277, 287 in Russia, 190, 327, 331-32, 500 Smith and, 261 in United States, 52, 278 Rumsfeld, Donald, 62, 64, 209, 210 Russia, 135-36, 139-40, 259, 275, 293, 310, 3 2 2 23, 334n debt default of, 190-96, 250, 328, 331 future of, 500 market capitalism in, 123-24, 139-40, 323-27, 503 oil and gas in, 190, 3 2 4 - 3 1 , 440, 443 oligarchs in, 139, 140, 190, 324, 326 property rights in, 139-40, 190, 327, 331-32, 389, 500 shock therapy in, 138—40 technology in, 3 3 1 , 388 see also Soviet Union Safire, William, 57 Sala-i-Martin, Xavier, 259n-60n Samuelson, Robert, 230 S&P 500, 207, 224, 426n, 465 Sao Tome and Principe, 258-59 Sarbanes, Paul, 154-55, 2 2 1 , 478 Sarbanes-Oxley Act (2002), 374, 430-31 Sarkozy, Nicolas, 288, 500 Saudi Arabia, 79-80, 334n, 351, 438n oil of, 79, 438n Saudi Aramco, 79, 439, 440, 442 savings, 12, 138, 185, 270, 348-52, 362, 369, 3 8 4 88, 4 7 8 , 4 9 9 cross-border, 348, 352, 484 in developing vs. industrialized countries, 13, 386, 484 domestic, current account balance and, 348—49, 350 excess of, 13-14 future standards of living and, 413 investment vs., 348-49, 385, 386-87 savings accounts, 114, 115 savings and loans (S&Ls), 6, 114-17, 290, 357n SBC Communications, 229 Scargill, Arthur, 283 Scholes, Myron, 193 527 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright.


pages: 334 words: 98,950

Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism by Ha-Joon Chang

"there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Albert Einstein, Big bang: deregulation of the City of London, bilateral investment treaty, borderless world, Bretton Woods, British Empire, Brownian motion, business cycle, call centre, capital controls, central bank independence, colonial rule, Corn Laws, corporate governance, David Ricardo: comparative advantage, Deng Xiaoping, Doha Development Round, en.wikipedia.org, export processing zone, falling living standards, Fellow of the Royal Society, financial deregulation, financial engineering, fixed income, foreign exchange controls, Francis Fukuyama: the end of history, income inequality, income per capita, industrial robot, Isaac Newton, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, land reform, liberal world order, liberation theology, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, mega-rich, moral hazard, Nelson Mandela, offshore financial centre, oil shock, price stability, principal–agent problem, Ronald Reagan, South Sea Bubble, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transfer pricing, urban sprawl, World Values Survey

The problem with such a subjective measure is well illustrated by the fact that the perceptions of corruption in the Asian countries affected by the 1997 financial crisis suddenly rose significantly after the crisis, despite having almost constantly fallen in the preceding decade (see H-J. Chang [2000], ‘The Hazard of Moral Hazard – Untangling the Asian Crisis’, World Development, vol. 28, no. 4). Also, what is perceived as corruption depends on the country, thus affecting the expert perception too. For example, in a lot of countries, US-style spoils disbursement of government jobs will be considered corrupt, but it is not considered so in the US.

Therefore, even though soft budget constraints are more likely for SOEs due to their ownership status, the key cause of the problem is the incentives for the SOE managers, rather than soft budget constraints. If that is the case, privatization is unlikely to change the performances of the enterprises involved. For further discussion, see H-J. Chang (2000), ‘The Hazard of Moral Hazard – Untangling the Asian Crisis’, World Development, vol. 28, no. 4. 3 T. Georgakopolous, K. Prodromidis, & J. Loizides (1987), ‘Public Enterprises in Greece’, Annals of Public and Cooperative Economics, vol. 58, no. 4. 4 The Wall Street Journal, May 24 1985, as quoted in J. Roddick (1988), The Dance of the Millions: Latin America and the Debt Crisis (Latin America Bureau, London), p109. 5 Temasek Holdings owns majority shares in the following enterprises: 100% of Singapore Power (electricity and gas) and of PSA International (ports), 67% of Neptune Orient Lines (shipping), 60% of Chartered Semiconductor Manufacturing (semiconductor), 56% of SingTel (telecommunications), 55% of SMRT (rail, bus and taxi services), 55% of Singapore Technologies Engineering (engineering) and 51% of SembCorp Industries (engineering).


Rockonomics: A Backstage Tour of What the Music Industry Can Teach Us About Economics and Life by Alan B. Krueger

"Friedman doctrine" OR "shareholder theory", accounting loophole / creative accounting, Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, autonomous vehicles, bank run, behavioural economics, Berlin Wall, bitcoin, Bob Geldof, butterfly effect, buy and hold, congestion pricing, creative destruction, crowdsourcing, digital rights, disintermediation, diversified portfolio, Donald Trump, endogenous growth, Gary Kildall, George Akerlof, gig economy, income inequality, independent contractor, index fund, invisible hand, Jeff Bezos, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kickstarter, Larry Ellison, Live Aid, Mark Zuckerberg, Moneyball by Michael Lewis explains big data, moral hazard, Multics, Network effects, obamacare, offshore financial centre, opioid epidemic / opioid crisis, Paul Samuelson, personalized medicine, power law, pre–internet, price discrimination, profit maximization, random walk, recommendation engine, rent-seeking, Richard Thaler, ride hailing / ride sharing, Saturday Night Live, Skype, Steve Jobs, the long tail, The Wealth of Nations by Adam Smith, TikTok, too big to fail, transaction costs, traumatic brain injury, Tyler Cowen, ultimatum game, winner-take-all economy, women in the workforce, Y Combinator, zero-sum game

For example, contracts now typically require the record company to distribute a specified percentage of revenue from song streams and album sales to the artist. As the economist Richard Caves has noted, “From the artist’s viewpoint, a problem of moral hazard arises because the label keeps the books that determine the earnings remitted to the artist.”2 Examples of labels underreporting sales, and thus underpaying royalties to artists, are legion. The Beatles were locked in lawsuits over insufficient payment of royalties with EMI and its U.S. subsidiary Capitol Records for years. The potential for moral hazard in accounting practices leads to an obvious strategy that can be summarized as “Trust but verify.” Artists benefit from having the ability to have their representatives audit their label’s books.


pages: 347 words: 99,317

Bad Samaritans: The Guilty Secrets of Rich Nations and the Threat to Global Prosperity by Ha-Joon Chang

"there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Albert Einstein, banking crisis, Big bang: deregulation of the City of London, bilateral investment treaty, borderless world, Bretton Woods, British Empire, Brownian motion, business cycle, call centre, capital controls, central bank independence, colonial rule, Corn Laws, corporate governance, David Ricardo: comparative advantage, Deng Xiaoping, Doha Development Round, en.wikipedia.org, export processing zone, falling living standards, Fellow of the Royal Society, financial deregulation, financial engineering, fixed income, foreign exchange controls, Francis Fukuyama: the end of history, income inequality, income per capita, industrial robot, Isaac Newton, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, land reform, liberal world order, liberation theology, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, mega-rich, moral hazard, Nelson Mandela, offshore financial centre, oil shock, price stability, principal–agent problem, Ronald Reagan, South Sea Bubble, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transfer pricing, urban sprawl, World Values Survey

The problem with such a subjective measure is well illustrated by the fact that the perceptions of corruption in the Asian countries affected by the 1997 financial crisis suddenly rose significantly after the crisis, despite having almost constantly fallen in the preceding decade (see H-J. Chang [2000], ‘The Hazard of Moral Hazard – Untangling the Asian Crisis’, World Development, vol. 28, no. 4). Also, what is perceived as corruption depends on the country, thus affecting the expert perception too. For example, in a lot of countries, US-style spoils disbursement of government jobs will be considered corrupt, but it is not considered so in the US.

Therefore, even though soft budget constraints are more likely for SOEs due to their ownership status, the key cause of the problem is the incentives for the SOE managers, rather than soft budget constraints. If that is the case, privatization is unlikely to change the performances of the enterprises involved. For further discussion, see H-J. Chang (2000), ‘The Hazard of Moral Hazard – Untangling the Asian Crisis’, World Development, vol. 28, no. 4. 3 T. Georgakopolous, K. Prodromidis, & J. Loizides (1987),‘Public Enterprises in Greece’, Annals of Public and Cooperative Economics, vol. 58, no. 4. 4 The Wall Street Journal, May 24 1985, as quoted in J. Roddick (1988), The Dance of the Millions: Latin America and the Debt Crisis (Latin America Bureau, London), p109. 5 Temasek Holdings owns majority shares in the following enterprises: 100% of Singapore Power (electricity and gas) and of PSA International (ports), 67% of Neptune Orient Lines (shipping), 60% of Chartered Semiconductor Manufacturing (semiconductor), 56% of SingTel (telecommunications), 55% of SMRT (rail, bus and taxi services), 55% of Singapore Technologies Engineering (engineering) and 51% of SembCorp Industries (engineering).


pages: 371 words: 98,534

Red Flags: Why Xi's China Is in Jeopardy by George Magnus

"World Economic Forum" Davos, 3D printing, 9 dash line, Admiral Zheng, AlphaGo, Asian financial crisis, autonomous vehicles, balance sheet recession, banking crisis, Bear Stearns, Bretton Woods, Brexit referendum, BRICs, British Empire, business process, capital controls, carbon footprint, Carmen Reinhart, cloud computing, colonial exploitation, corporate governance, crony capitalism, currency manipulation / currency intervention, currency peg, demographic dividend, demographic transition, Deng Xiaoping, Doha Development Round, Donald Trump, financial deregulation, financial innovation, financial repression, fixed income, floating exchange rates, full employment, general purpose technology, Gini coefficient, global reserve currency, Great Leap Forward, high net worth, high-speed rail, hiring and firing, Hyman Minsky, income inequality, industrial robot, information security, Internet of things, invention of movable type, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, labour mobility, land reform, Malacca Straits, means of production, megacity, megaproject, middle-income trap, Minsky moment, money market fund, moral hazard, non-tariff barriers, Northern Rock, offshore financial centre, old age dependency ratio, open economy, peer-to-peer lending, pension reform, price mechanism, purchasing power parity, regulatory arbitrage, rent-seeking, reserve currency, rising living standards, risk tolerance, Shenzhen special economic zone , smart cities, South China Sea, sovereign wealth fund, special drawing rights, special economic zone, speech recognition, The Wealth of Nations by Adam Smith, total factor productivity, trade route, urban planning, vertical integration, Washington Consensus, women in the workforce, working-age population, zero-sum game

It exists, literally, in the shadow of the banks, because the mainstream banks are so dominant in the economy.19 Unlike the US and other Western countries, there are relatively few independent non-bank institutions, and securitised assets and market-based financial instruments play a quite limited role. The $9 trillion bond market is closely linked to funding from WMPs. An important feature of China’s system, moreover, is the pervasiveness of perceived and actual guarantees, which shield investors from loss and incubate moral hazard. The Chinese regulatory authorities have stepped up so-called macro-prudential regulation considerably since 2017. They have instructed banks to refrain from certain types of investment and from issuing forms of financial support for some investment products. These measures are designed to remove or weaken bank guarantees from certain asset management products by 2019, which would be a positive development, but we must wait to see if this happens.

Pressing issues for the committee will be to dampen down leverage and arbitrage in the $15 trillion asset management industry, and to try and end the ubiquitous practice of guaranteeing capital and interest payments to investors, which speak to a low level of confidence in the security or value of contracts. Draft rules, which have a mid-2019 target for implementation, would force banks to move many assets back on to their balance sheets, where they would be more transparent and subject to established capital adequacy, liquidity and risk rules. Ending the guarantees, while justified from a moral hazard point of view, might nevertheless run into stiff opposition from both banks and investors, and even other regulators if this involved sudden and large losses. Banks are worried about their income and liquidity if regulators succeed in introducing measures that end up curtailing their access to short-term deposits.


Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies by Nik Bhatia

Alan Greenspan, bank run, basic income, Bear Stearns, bitcoin, blockchain, Bretton Woods, British Empire, central bank independence, Cornelius Vanderbilt, Credit Default Swap, cryptocurrency, distributed ledger, fiat currency, fixed income, Fractional reserve banking, interest rate derivative, interest rate swap, Isaac Newton, joint-stock company, Kickstarter, Long Term Capital Management, margin call, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, offshore financial centre, quantitative easing, reserve currency, risk free rate, Satoshi Nakamoto, slashdot, smart contracts, time value of money, tulip mania, universal basic income

Financial crises during the era corresponded with sudden surges in the demand for cash, whereupon those either issuing or holding third-layer money required liquidity in the form of second-layer Bank of England notes. When the demand for cash swelled, Bagehot explained that second-layer money must be created by the central bank in order to satisfy that demand. It should flex its power of elasticity while still maintaining discipline in order not to encourage moral hazard, which occurs when a financial institution takes on excessive risk because it anticipates being rescued by the government or central bank if its financial position sours. The BoE would provide liquidity by discounting bills they deemed to be temporarily in need of support, not bills that were destined for default regardless of the financial climate.


pages: 398 words: 105,032

Soonish: Ten Emerging Technologies That'll Improve And/or Ruin Everything by Kelly Weinersmith, Zach Weinersmith

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 23andMe, 3D printing, Airbnb, Alvin Roth, Apollo 11, augmented reality, autonomous vehicles, connected car, CRISPR, data science, disinformation, double helix, Elon Musk, en.wikipedia.org, Google Glasses, hydraulic fracturing, industrial robot, information asymmetry, ITER tokamak, Kickstarter, low earth orbit, market design, megaproject, megastructure, microbiome, moral hazard, multiplanetary species, orbital mechanics / astrodynamics, personalized medicine, placebo effect, printed gun, Project Plowshare, QR code, Schrödinger's Cat, self-driving car, Skype, space junk, stem cell, synthetic biology, Tunguska event, Virgin Galactic

Thus it’s possible, though perhaps unlikely, that 3D printed organs could introduce new diseases into the body. But just like sterile surgical technique should keep bacteria out of the body during surgeries, sterile techniques in the bioprinting lab should keep bacteria out of printed organs. There is a social concern as well—what economists call “moral hazard.” The idea is that if you put people in situations where they can behave badly, you will probably get bad behavior. The (recently) classic example is a banker who can get a bailout if things go badly for his bank, so he makes stupid loans. Just the same, if you’re not worried about any of your organs, you might start engaging in more risky behavior in terms of sex, drugs, and cheeseburgers.

., 13 “magic book,” 176 MagLIF (Magnetized Liner Inertial Fusion) project, 87–88 “magnetic confinement”-type reactors, 85 magnetic levitation (MagLev) trains, 24–25, 30, 327 magnetosphere, 59 magnets, 5 MakerBot, 162 malaria, 198–203, 207 mammoth genome, 222–24 Mankins, John, 320 marble, 144 marching bands, 119–20 Mars, 19, 40, 45n, 52, 55, 158–59 Mars One project, 45n Masiello, Carrie, 210–11 Massachusetts General Hospital, 242 Massachusetts Institute of Technology (MIT), 102, 103, 104, 106, 107n, 108, 214, 216 Mediated Matter lab at, 146 Plasma Science and Fusion Center at, 91 matching markets, 275–81 Matthews, Kirstin, 250 Maus, Marcela, 242–43 Max Planck Institute for Infection Biology, 212 µBiome, 2 M-blocks, 118 MD Anderson Cancer Center, 232, 234 Mediated Matter lab, 146 medical tourism, 272 medical trials, 254–55, 268–69 medicine, 221 augmented reality in, 179, 185–86 bioprinting and, see bioprinting origami robots in, 106–7 programmable matter in, 127–28 synthetic biology in, 198–207 see also precision medicine Meetup.com, 175, 179 MEG (magnetoencephalography), 289–90, 291 Meissner effect, 326 meltdown, 91–92 memory, 220, 304, 307–8, 311 Mendelsohn, John, 232, 234 Meng, Yan, 122 Menges, Achim, 104 Menon, Sandeep, 235 messenger RNA, 193 metabolome, 244–46 meteorites, 53, 67 Michigan Array, 296, 298 microRNA, 239–40, 246–47 Microsoft, 272 Miller, Jordan, 261, 269, 270–71, 274 miniaturization, 176 “Minibuilders,” 151–52 miRBase, 240 mirror humans, 332–35 MIT Technology Review, 6n molds, configurable, 134 molecular scissors, 212, 213–14 molecules, mirror, 334 monogenic traits, 196–97 mononucleosis, 230 moon, 55 moon landing, 19 moral hazard, 273–74 Moravec’s Paradox, 139 mosquitoes, 200, 203, 218 Mossad, 50 motion sickness, 168 movies, 183 MRI (magnetic resonance imaging), 290–91 M-type (metal) asteroids, 53, 54 mucociliary escalator, 187–88 mucus, 236 Mukhopadhyay, Aindrila, 210 multiverse, 329 Munger, Steven, 334–35 Musk, Elon, 19 mutation breeding, 191–92 mutations, 219, 236–37 Mycoplasma genitalium, 214–15 Mycoplasma laboratorium, 215 Mycoplasma mycoides, 215n Nagasaki bombing, 98 nano-bio-machines, 3 nanobots, 118 nanotechnology, 221 NASA Innovative Advanced Concepts (NIAC), 25, 31, 35 nasal cycle, 186–89 nasal venous sinusoids, 188 NASA (National Aeronautics and Space Administration), 20, 47, 60, 65, 92, 158, 159–60 National Academy of Sciences, 203 National Cancer Institute, 238 National Defence Department, Canada, 47 National Ignition Facility (NIF), 86–87 National Institutes of Health, 214, 234, 235 Native Americans, 196n natural gas, 73, 98–99 Nebraska, University of, 176 Neufert, Ernst, 135 neural dust, 299 neural implants, 310 Neurobridge, 312 neuro-cyber-connection, 312–13 neurons, 286–87, 290, 298, 306 EEGs and, 287–90 NeuroPace, 302 neuroprosthetics, 311, 315, 322, 324 neurotrophic electrodes, 297–98, 315, 316 Neutron Club, 80 neutron gun, 80–81 neutrons, 73, 91 New Jersey, 299 New Mexico, 96 nickel, 54 Nocera, Dan, 208 North Carolina State University, 63 Norway, 22n nostrils, 186–89 Nuclear Explosions for the National Economy, 100 nuclear reactors, 58 Nucleon (concept car design), 97 nucleus, 192, 193 nutrition, 245–46 Olestra, 334 Oliver, John, 326n Open Humans Foundation, 252n “optical mining,” 63 orbiting factory, 24 organ donation, 257n organ markets, 274, 275–81 Organovo, 268 organ rejections, 275 organ sales, 258, 280–81 organ transplant list, 257–58, 272 organ transplants, 206–7 origami robots, 105–8, 129 OSIRIS-REx, 65 “Our Friend the Atom” (Disney cartoon), 97 Outer Space Treaty (1967), 63–64 oxidizer, 20 Oxman, Neri, 146, 148 oxygen, 208–9 oxygen deprivation, 205 oxygen gas, 82 Pacific Ocean, 35–36 Paddon, Chris, 199 Palo Alto Research Center, 116 Panama Canal, 97 pancreas, 236 parallel universe, 329 paralysis, 312 Parkinson’s disease, 301 patenting, 124 patent law, 272 peacekeepers, 181 Pennsylvania, University of, 108 Personal Genome Project, 252–53 personal security, 124–25 PERVs, 207 pesticides, 200 Petersen, Kirstin, 149, 150–51 Pfizer, 235 phobias, 179 Phobos (moon of Mars), 55 phosphenes, 306 photosynthesis, 208 Picon, Antoine, 138 pigs, 206 Piraha (Amazonian tribe), 140n Pitt, Brad, 167 Plait, Phil, 36, 38 plants, 125 Chinese sweet wormwood, 198–99 plasma, 85, 88 Plasma Science and Fusion Center, 91 platinum, 52, 55 pluripotent stem cells, 273 plutonium, 58 pogo sticks, 27 Pokémon GO, 8n, 166, 182–83 pollution, 94 porcine endogenous retroviruses (PERVs), 207 positive transcriptional autoregulation, 205n potassium iodide pills, 60 poverty, 157 precision medicine, 229–56 benefits of, 254–56 cancer diagnosis, treatment, and monitoring in, 238–44 concerns about, 248–53 data collection in, 234–35 genetic disorders and, 235–37 metabolome and, 244–46 privacy issues in, 248, 250–53 Precision Medicine Initiative Cohort Program, 234 predictive ability, 1–2 Princeton University, 142, 271 privacy issues, 130, 182, 248 of AR, 180–81 in brain-computer interfaces, 309–10 in precision medicine, 248, 250–53 programmable matter, 101–32 benefits of, 125–29 computers as, 101 concerns about, 122–25 in everyday life, 105 hacking of, 122–23 military applications of, 123–24 origami robots as, 105–8 power for, 118 reconfigurable houses and, 109–11 see also robots programmed materials, 103–5 Project Babylon, 48–49 Project Esper, 185 Project HARP (High Altitude Research Project), 47, 48 Project Plowshare, 96–100 Project Rulison, 98 Promobot, 129 Promobot IR77, 129 propellants, 14–15, 18, 20, 23 prostate cancers, 239n, 247 prosthetics, advanced, 322–24 proteins, 193, 194, 195, 221, 234, 239, 332 protium, 73 protons, 73, 77 Pryor, Richard, 328n QR code, 169–71 quantum computing, 328–30 quantum mechanics, 329, 330 Quinn, Roger, 151n radiation, 59–60, 62, 99 radiation therapy, 241 radioactive waste, 91 railgun, electromagnetic, 24–25 ramjet, 21, 22, 26 Reaction Engines, 22 Recognizer, 180 Reconfigurable House exhibit, 111 recycled fecal matter, 160 recycling, 128 Reece, Andrew, 247 refining, 56 refrigeration, 4 “Registry of Standard Biology Parts,” 216 Reichert, Steffen, 104 Reiss, Louise and Eric, 99 RepRap, 269–70 “repugnance,” in markets, 276 reuse, 128 ribosome, 193–94, 195 Rice University, 200n, 210, 250, 261 rigid airship, 29–30 Ringeisen, Bradley, 259 RNA, 193–94, 195, 332 RNS System, 302 Robinette, Paul, 130 Robot Baby Project, 120n robotic construction, 134–63 benefits of, 156–59 concerns about, 153–56 and space travel, 158–59 swarm robots in, 149–53 3D printing for, 144–49 robots, 102, 129–32 autonomous, 113–16 as construction workers, 139–44 coordinating movement of many, 119–22 evolving of, 120–22 generalization in, 142 industrial, 136 in medicine, 127–28 modular, 112–16 neuroprosthetics and, 311 origami, 105–8, 129 termite-inspired, 150–51 see also programmable matter rocket launches, 3 rockets, 23, 39 air-breathing, 19–24 aircraft-launched, 29–30 cost of, 14 laser ignition for, 27–29 propellant for, 14–15, 18, 20, 23 reusable, 14, 15, 18–19, 39 simplicity of, 22 stages of, 18n rocket sled, 25, 26 rockoon, 29 rod from God, 38 roller coaster, 23, 42 Romanishin, John, 118 Roombots, 112–13, 121, 127 Roth, Alvin, 276, 277, 279, 280 “Ruby Red” grapefruit, 192 Rus, Daniela, 106–7, 108, 118, 128 Russia, 67, 99, 217n SABRE (Synergetic Air-Breathing Rocket Engine), 22 Saddest Generation, 166 Safe Is Not an Option: Overcoming the Futile Obsession with Getting Everyone Back Alive That Is Killing Our Expansion into Space (Simberg), 44 Sahara Desert, 321 SAM (robot), 141, 142, 153–54 Sandia Labs, 85, 87 San Francisco, Calif., 154 sanitation, 157 satellites, 20, 34, 41, 47 Schalk, Gerwin, 313 Schall, Gerhard, 177 Schrödinger’s cat, 329 Schrödinger’s Killer App (Dowling), 330n Schwenk, Kurt, 187 See No Evil, Hear No Evil (film), 328n seizures, 300, 301, 302 Select Sires, Incorporated, 197n self-driving cars, 123 Sensorama, 168 Shapiro, Beth, 222, 223–24 Shotwell, Gwynne, 19 Shtetl-Optimized (blog), 330n Siberia, 224 sickle cell amenia, 237 Silberg, Joff, 210–11, 218–19 silicon, 52, 54 Silver, Pamela, 204, 205–6, 208–10, 219 Simberg, Rand, 44 Skylon, 22 Skype, 314 Skywalker, Luke (char.), 324 Slingatron, 25–26 slums, 157 smallpox, 216, 217 Smart Helmet, 179 “smart homes,” 111 smartphones, 169 smell, sense of, 174–75, 186–89, 334 Smith, Noah, 153n, 154 snakes, 187 social media, 248, 250 privacy issues of, 180–81 software, 102, 104–5, 124 hacking of, 122 solar flares, 60 solar panels, 58 cost of, 320 solar photovoltaic cells, 92, 208 solar power, space-based, 319–21 solar wind, 37 Solid Freeform Fabrication Symposium, 162 solid rocket boosters, 39 solid tumors, 238, 240–41 Solomon, Scott, 200n sound, speed of, 21 South Africa, 48 Southern California, University of, 145, 308 Soviet Union, 38, 58, 99, 100, 135 space cannon, 23–26 space debris, 39–40 space elevators, 31–38, 39, 41, 42–43, 314, 320 spaceflight, 13–50 air-breathing rockets and spaceplanes for, 19–24 benefits of, 41–45 concerns about, 38–40 cost of, 41, 44–45 present cost of, 13–14 reusable rockets for, 18–19 space elevators and tethers for, 31–38 starting at high altitude, 29–30 spaceplanes, 19–24, 39 space settlements, 40 Space Shuttle, U.S., 18, 39 space tethers, 31–38 space tourism, 42 space travel: fusion energy in, 94 supergun for, 23–26 SpaceX, 8n, 18–19, 30 spatial resolution, 288, 289, 292–93 spearmint, 334 spinal damage, 312 Sputnik, 39 SR-71 spy plane, 21 Starbucks, 180 Star Trek franchise, 34, 86 Star Wars franchise, 78n, 82, 263 steam turbine, 76 stem cells, 263, 272–73 Stevens Institute of Technology, 92, 122 STL-file, 267 storytelling, 178 stratospheric spaceport, 29–30 straw, reconfigurable, 103–4 stress, 246 stroke, 247 strong nuclear force, 77 strontium-90 (Sr-90), 99 Stuttgart, University of, 104, 143 S-type (stony) asteroids, 53, 54 sugar molecules, 210 sugar sintering, 270–71 sun, 59, 78 Sung, Cynthia, 108, 119, 127 superconducting levitation, 326–27 superconducting quantum interference device (SQUID), 4, 6, 290 superconductors, 4–6 room-temperature, 325–28 supergun, 46–50 supersonic ramjet (“scramjet”), 21–22, 26, 126 Sure Shot Cattle Company, 197n surgery, 185–86 Surrey, University of, 122 swarm bots, 119–20, 121–22 SWARMORPH project, 113–15 swarm robots, 149–53 switchgrass, 209–10 Switzerland, 22n SYMBRION, 115 Syn 3.0, 215 synthetic biology, 190–225 benefits of, 220–21 concerns about, 216–19 environmental monitoring by, 210–12 fuel production by, 208–10 generalizing of, 212–14 grassroots approach to, 216 “Synthetic Biology for Recycling Human Waste into Food, Nutraceuticals, and Materials: Closing the Loop for Long-Term Space Travel” project, 160 synthetic materials, 101–2 syphilis, 230n Syria, 156 Systems & Materials Research Consultancy, 159 T cells, 242–43 technology, 3–4 asteroid-moving, 67 contingent nature of development of, 3–7 discontinuous leaps in, 2 Telegraph, 183 Teller, Edward, 98 temporal resolution, 288, 292–93 Terminator (film), 103 termites, 120, 149, 150–51 terrorism, 36, 38, 217 Tethers Unlimited, 63 tetracycline, 200 theft, 130 3D printers, 144–49, 151–52, 259 prosthetics and, 322 3D printing, 125, 152 of food, 159–63 of organs, see bioprinting software for, 267 3554 Amun, 53 Throw Trucks with Your Mind (game), 312 thyroid, 60 Tibbits, Skylar, 103–5, 118, 123, 126 titanium, 35 “tokamak” configuration, 88, 92 tornados, 25 touch, sense of, 175 Tourette’s syndrome, 301 transcranial magnetic stimulation, 302, 304 transfer RNA, 193–94, 195 Transformers series, 102 The Tree of Life (Web site), 234n tritium, 74, 77n, 91 tumor cells, 205 tumors, 290 “Tunable Protein Piston That Breaks Membranes to Release Encapsulated Cargo, A” (Silver, et al.), 206 “Tunguska event” (1908), 67 turbofan engine, 20–21, 22 Turner, Ron, 35, 36, 37 23andMe, 251, 252 Twitter, 20n, 187, 250 Two and a Half Men (TV show), 310 Type II superconductors, 326 Umbrellium (Haque Design + Research), 111 Underground Railroad, 178 UN-Habitat, 157 Unilateral Forced Nostril Breathing (UFNB), 189 United Nations, 96 United States, 39, 135–36 Universal Semen Sales, Inc., 197n uranium, 58 U.S.


pages: 405 words: 109,114

Unfinished Business by Tamim Bayoumi

Alan Greenspan, algorithmic trading, Asian financial crisis, bank run, banking crisis, Basel III, battle of ideas, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, book value, Bretton Woods, British Empire, business cycle, buy and hold, capital controls, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, currency peg, Doha Development Round, facts on the ground, Fall of the Berlin Wall, financial deregulation, floating exchange rates, full employment, Glass-Steagall Act, Greenspan put, hiring and firing, housing crisis, inflation targeting, junk bonds, Just-in-time delivery, Kenneth Rogoff, liberal capitalism, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, oil shale / tar sands, oil shock, price stability, prisoner's dilemma, profit maximization, quantitative easing, race to the bottom, random walk, reserve currency, Robert Shiller, Rubik’s Cube, Savings and loan crisis, savings glut, technology bubble, The Great Moderation, The Myth of the Rational Market, the payments system, The Wisdom of Crowds, too big to fail, trade liberalization, transaction costs, value at risk

And just as in Asia, where the exit of foreign investors jumped from the internationally exposed Thailand to less exposed Indonesia and Malaysia and finally to South Korea, (whose problems were largely home-grown), the Euro area crisis jumped from unsustainable foreign-financed borrowing by the Greek government, to Ireland, Portugal, and Spain—countries where the private sector was responsible for excess foreign borrowing—and then to Italy, whose financial problems reflected low growth rather than excessive foreign borrowing. On the other hand, the popular view that the North Atlantic crisis was brought about by “too big to fail” banks exploiting implicit government guarantees for their own ends finds little support in the historical record. While moral hazard can be important in misdirecting financial flows, there do not seem to be earlier cases where banks deliberately financed a crisis on the assumption that they would be bailed out. Banks were not important drivers of the collapse of Bretton Woods or the ERM crises. Bank flows played a more important role in the Asia crisis, but excessive optimism about future growth seems to be a more convincing explanation for the boom in foreign financing than expectations of a bailout.

While this disagreement went into relative abeyance in the decade after the Euro was launched, when rapid convergence appeared to be occurring, it has resurfaced since the crisis, recast as a discussion about whether to loosen existing policy constraints in order to provide support for countries in crisis or maintain the rules so as to avoid further moral hazard in the future. Tension over this issue is unlikely to be resolved soon given that it has been simmering for almost half a century. Since the crisis, progress has been made in providing better responses to diverse shocks with the Euro area. Banking supervision has been centralized, providing the potential for a truly integrated banking system of the type taken for granted in most currency unions, including the United States.


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

Andrei Shleifer, asset-backed security, Bear Stearns, behavioural economics, Bernie Madoff, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, collapse of Lehman Brothers, compensation consultant, corporate raider, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, desegregation, 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, junk bonds, Kenneth Arrow, Kenneth Rogoff, late fees, loss aversion, market bubble, Menlo Park, mental accounting, Michael Milken, 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 Solow, Ronald Reagan, Savings and loan crisis, short selling, Silicon Valley, stock buybacks, the new new thing, The Predators' Ball, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, 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

There is now abroad in the land a view that the fiscal and the monetary authorities should not have responded either so quickly or so vigilantly in 2008–9. In this view, the expectation of intervention at the time of the crisis was its primary cause. (In economic-speak, it is said that the run-up in asset prices occurred because of “moral hazard.”) But on the contrary, our view of finance, and the detailed facts that support our view, show that when run-ups in prices occur, they usually do so because of irrational exuberance, aided and abetted by phishes. The irrationally exuberant did not have on their minds the returns they would garner if the fiscal and monetary authorities intervened to maintain the economy and the flow of credit; or, in the extreme case, if their bank, or their enterprise, were “bailed out.”

See stories Merck, 86, 87–90, 92, 94, 145, 209n25 Mérimée, Prosper, 214n19 Milgram, Stanley, 186–87n26 Milken, Michael: career of, 125, 126; compensation of, 131, 223n27; downfall of, 131–32; High-Yield Bond Conferences, 131; junk bond market and, 125–27, 130–31, 132–33; leveraged buyouts, 124, 127–30; phishing by, 126, 128–31, 132–33 Miller, Jessica, 203n7 Miller, Stephen, 228n8 Minow, Nell, 141 Mitchell, Constance, 221n5 Mitford, Jessica, 182n17 Mongelli, Lorena, 229n30 monkey-on-the-shoulder tastes, 4–5, 6, 20, 54, 59, 170–71, 172 Moody’s, 27–28, 31, 34, 191n13, 192n28, 192n30. See also credit ratings agencies moral community, 145–46 moral hazard, 134 Morello, John A., 197nn39–41 Morgenson, Gretchen, 189–90n1 Morris, Robert, 100 Morris, Sue, 203n3 Morrissey, Stephen, 208–9n21, 209n23, 210n43 mortgage-backed securities: in ABACUS, 143; credit default swaps and, 38–40; credit ratings of, 24–25, 32–35, 36–37, 192nn28–30; default risk of, 33, 35, 36–37, 38, 143, 165; development of, 32; short selling, 34–35, 143; subprime loans in, xiv, 32–33, 36, 192n30; tranches of, 33 mortgage brokers, 65–66, 201n20 mortgages: fees of, 65, 200n16, 201n20; interest payments on, 201n32; interest rates on, 119; subprime, xiv, 32–33, 36, 192n30.


pages: 319 words: 106,772

Irrational Exuberance: With a New Preface by the Author by Robert J. Shiller

Alan Greenspan, Andrei Shleifer, asset allocation, banking crisis, benefit corporation, Benoit Mandelbrot, book value, business cycle, buy and hold, computer age, correlation does not imply causation, Daniel Kahneman / Amos Tversky, demographic transition, diversification, diversified portfolio, equity premium, Everybody Ought to Be Rich, experimental subject, hindsight bias, income per capita, index fund, Intergovernmental Panel on Climate Change (IPCC), Joseph Schumpeter, Long Term Capital Management, loss aversion, Mahbub ul Haq, mandelbrot fractal, market bubble, market design, market fundamentalism, Mexican peso crisis / tequila crisis, Milgram experiment, money market fund, moral hazard, new economy, open economy, pattern recognition, Phillips curve, Ponzi scheme, price anchoring, random walk, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, Small Order Execution System, spice trade, statistical model, stocks for the long run, Suez crisis 1956, survivorship bias, the market place, Tobin tax, transaction costs, tulip mania, uptick rule, urban decay, Y2K

Weiss, “Index-Based Futures and Options Trading in Real Estate,” Journal of Portfolio Management, 19(2) (1993): 83–92; Robert J. Shiller and Allan N. N O TE S TO PAG E S 230–232 267 Weiss, “Home Equity Insurance,” Journal of Real Estate Finance and Economics, 19 (1999): 21–47; and Robert J. Shiller and Allan N. Weiss, “Moral Hazard in Home Equity Conversion,” forthcoming in Real Estate Economics (2000). 30. Shiller, Macro Markets, pp. 42–46. For a description of the macro securities (proxy assets) system that Allan Weiss and I devised, see our patent 5,987,435 (Proxy Asset Data Processor) at http://www.uspto.gov/patft/. Macro Securities LLC, a subsidiary of Case Shiller Weiss, Inc., is developing these securities. 31.

., and John Pound. “Survey Evidence on the Diffusion of Interest and Information among Investors.” Journal of Economic Behavior and Organization, 12 (1989): 47–66. Shiller, Robert J., and Allan N. Weiss. “Home Equity Insurance.” Journal of Real Estate Finance and Economics, 19 (1999): 21–47. ———. “Moral Hazard in Home Equity Conversion.” Real Estate Economics, forthcoming, 2000. Shleifer, Andrei. Inefficient Markets: An Introduction to Behavioral Finance. Oxford: Oxford University Press, 2000. Siegel, Jeremy J. Stocks for the Long Run, 2nd ed. New York: McGraw-Hill, 1998. Smith, Edgar Lawrence. Common Stocks as Long-Term Investments.


pages: 353 words: 110,919

The Road to Character by David Brooks

Cass Sunstein, coherent worldview, David Brooks, desegregation, digital rights, Donald Trump, follow your passion, George Santayana, Mahatma Gandhi, meta-analysis, military-industrial complex, moral hazard, New Journalism, Ralph Waldo Emerson, rent control, Snapchat, Steve Jobs, Triangle Shirtwaist Factory, union organizing, Upton Sinclair, upwardly mobile, you are the product

The niceties of her class fell away. She became impatient with the way genteel progressives went about serving the poor. She became impatient with their prissiness, their desire to stay pure and above the fray. Perkins hardened. She threw herself into the rough and tumble of politics. She was willing to take morally hazardous action if it would prevent another catastrophe like the one that befell the women at the Triangle factory. She was willing to compromise and work with corrupt officials if it would produce results. She pinioned herself to this cause for the rest of her life. Summoned Today, commencement speakers tell graduates to follow their passion, to trust their feelings, to reflect and find their purpose in life.

Even while acknowledging our own weaknesses and corruptions, Niebuhr continued, it is necessary to take aggressive action to fight evil and injustice. Along the way it is important to acknowledge that our motives are not pure and we will end up being corrupted by whatever power we manage to attain and use. “We take and must continue to take morally hazardous actions to preserve our civilization,” Niebuhr wrote in the middle of the Cold War. “We must exercise our power. But we ought neither to believe that a nation is capable of perfect disinterestedness in its exercise nor become complacent about particular degrees of interest and passion which corrupt the justice by which the exercise of power is legitimized.”36 Behaving in this way, he continued, requires the innocence of a dove and the shrewdness of a serpent.


pages: 401 words: 109,892

The Great Reversal: How America Gave Up on Free Markets by Thomas Philippon

airline deregulation, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, barriers to entry, Big Tech, bitcoin, blockchain, book value, business cycle, business process, buy and hold, Cambridge Analytica, carbon tax, Carmen Reinhart, carried interest, central bank independence, commoditize, crack epidemic, cross-subsidies, disruptive innovation, Donald Trump, driverless car, Erik Brynjolfsson, eurozone crisis, financial deregulation, financial innovation, financial intermediation, flag carrier, Ford Model T, gig economy, Glass-Steagall Act, income inequality, income per capita, index fund, intangible asset, inventory management, Jean Tirole, Jeff Bezos, Kenneth Rogoff, labor-force participation, law of one price, liquidity trap, low cost airline, manufacturing employment, Mark Zuckerberg, market bubble, minimum wage unemployment, money market fund, moral hazard, natural language processing, Network effects, new economy, offshore financial centre, opioid epidemic / opioid crisis, Pareto efficiency, patent troll, Paul Samuelson, price discrimination, profit maximization, purchasing power parity, QWERTY keyboard, rent-seeking, ride hailing / ride sharing, risk-adjusted returns, Robert Bork, Robert Gordon, robo advisor, Ronald Reagan, search costs, Second Machine Age, self-driving car, Silicon Valley, Snapchat, spinning jenny, statistical model, Steve Jobs, stock buybacks, supply-chain management, Telecommunications Act of 1996, The Chicago School, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, Travis Kalanick, vertical integration, Vilfredo Pareto, warehouse automation, zero-sum game

In addition, these loans are fundamentally risky: good borrowers can be unlucky and lose their jobs or their customers, and bad borrowers can pretend to be good. Savers, on the other hand, want less risk and more liquidity. They don’t want to buy rotten eggs, they don’t want to put all their eggs in the same basket, and they want to be able to sell their eggs if they need to. These issues have names in economics: rotten eggs are moral hazard and adverse selection; placing one’s eggs in different baskets is called diversification; eggs that can be sold are called liquid assets. The trouble—and the opportunity for financiers—is that borrowers and savers have conflicting demands. This creates the need for financial intermediaries. Without intermediaries, information costs would make it difficult for households to screen and monitor corporations and for corporations to pool household funds to raise sufficient capital.

In the US, it is typically performed by the Department of Justice or by the Federal Trade Commission; in the EU, by the Directorate-General for Competition. monopoly power: Monopoly power is a general term that refers to market power by a single firm, even when it has a few competitors. See and compare with pure monopoly. monopsony power: A situation in which a buyer has market power, such as when a firm is the only large employer in a town. moral hazard: A situation in which the provision of insurance or safety nets leads to reduced efforts or higher risk-taking behavior. For instance, unemployment or disability insurance can reduce individual incentives to work.net asset value (NAV): The value of a fund’s assets minus the value of its liabilities.


pages: 297 words: 108,353

Boom and Bust: A Global History of Financial Bubbles by William Quinn, John D. Turner

accounting loophole / creative accounting, Alan Greenspan, algorithmic trading, AOL-Time Warner, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, Big bang: deregulation of the City of London, bitcoin, blockchain, book value, Bretton Woods, business cycle, buy and hold, capital controls, Celtic Tiger, collapse of Lehman Brothers, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, debt deflation, deglobalization, Deng Xiaoping, different worldview, discounted cash flows, Donald Trump, equity risk premium, Ethereum, ethereum blockchain, eurozone crisis, fake news, financial deregulation, financial intermediation, Flash crash, Francis Fukuyama: the end of history, George Akerlof, government statistician, Greenspan put, high-speed rail, information asymmetry, initial coin offering, intangible asset, Irish property bubble, Isaac Newton, Japanese asset price bubble, joint-stock company, Joseph Schumpeter, junk bonds, land bank, light touch regulation, low interest rates, margin call, market bubble, market fundamentalism, Martin Wolf, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Network effects, new economy, Northern Rock, oil shock, Ponzi scheme, quantitative easing, quantitative trading / quantitative finance, railway mania, Right to Buy, Robert Shiller, Shenzhen special economic zone , short selling, short squeeze, Silicon Valley, smart contracts, South Sea Bubble, special economic zone, subprime mortgage crisis, technology bubble, the built environment, total factor productivity, transaction costs, tulip mania, urban planning

On 7 September 2008, the US Treasury placed Fannie Mae and Freddie Mac, two government-sponsored entities (GSEs) that had been established to increase the available mortgage finance for affordable homes, into conservatorship and injected substantial capital funds into them because of their perilous financial condition.29 Then on 15 September Lehman Brothers filed for bankruptcy. The government refused to bail it out, believing that it was not a systemic threat and that it needed to be allowed to fail in order to reduce the moral hazard problem associated with bailing out banks. However, it appears that Hank Paulson and the Bush administration were more motivated by the prospect of a bipartisan backlash against another bailout, which they feared would be dubbed ‘socialism’ by those on the right and ‘bailing out their friends on Wall Street’ by those on the left.

Central banks can provide liquidity through the lender of last resort function or through central bank purchases of securities on the open market.19 The lender of last resort ultimately ‘stands ready to halt a run out of real and illiquid financial assets into money by making more money available’.20 After the bursting of the dot-com technology bubble, the Federal Reserve eased monetary policy. However, this action may have created a moral hazard problem and therefore increased the likelihood of another bubble. What can governments do about political bubbles? Since a political bubble is generally created because it serves the government’s interest, the government itself is unlikely to end it. A government might try to commit to not creating a bubble in the future by passing laws placing constraints on one or more sides of the bubble triangle.


pages: 651 words: 186,130

This Is How They Tell Me the World Ends: The Cyberweapons Arms Race by Nicole Perlroth

4chan, active measures, activist lawyer, air gap, Airbnb, Albert Einstein, Apollo 11, barriers to entry, Benchmark Capital, Bernie Sanders, Big Tech, bitcoin, Black Lives Matter, blood diamond, Boeing 737 MAX, Brexit referendum, Brian Krebs, Citizen Lab, cloud computing, commoditize, company town, coronavirus, COVID-19, crony capitalism, crowdsourcing, cryptocurrency, dark matter, David Vincenzetti, defense in depth, digital rights, disinformation, don't be evil, Donald Trump, driverless car, drone strike, dual-use technology, Edward Snowden, end-to-end encryption, failed state, fake news, false flag, Ferguson, Missouri, Firefox, gender pay gap, George Floyd, global pandemic, global supply chain, Hacker News, index card, information security, Internet of things, invisible hand, Jacob Appelbaum, Jeff Bezos, John Markoff, Ken Thompson, Kevin Roose, Laura Poitras, lockdown, Marc Andreessen, Mark Zuckerberg, mass immigration, Menlo Park, MITM: man-in-the-middle, moral hazard, Morris worm, move fast and break things, mutually assured destruction, natural language processing, NSO Group, off-the-grid, offshore financial centre, open borders, operational security, Parler "social media", pirate software, purchasing power parity, race to the bottom, RAND corporation, ransomware, Reflections on Trusting Trust, rolodex, Rubik’s Cube, Russian election interference, Sand Hill Road, Seymour Hersh, Sheryl Sandberg, side project, Silicon Valley, Skype, smart cities, smart grid, South China Sea, Steve Ballmer, Steve Bannon, Steve Jobs, Steven Levy, Stuxnet, supply-chain attack, TED Talk, the long tail, the scientific method, TikTok, Tim Cook: Apple, undersea cable, unit 8200, uranium enrichment, web application, WikiLeaks, zero day, Zimmermann PGP

During the Cold War, the NSA did not have to reckon with this dilemma: Americans spied on Russian technology, while Russians backdoored American typewriters. But that was no longer the case. The world was now using the same Microsoft operating systems, Oracle databases, Gmail, iPhones, and microprocessors to power our daily lives. Increasingly, NSA’s work was riddled with conflicts of interest and moral hazards. Nobody seemed to be asking what all this breaking and entering and digital exploitation might mean for the NSA’s sponsors—American taxpayers—who now relied on NSA-compromised technology not only for communication but for banking, commerce, transportation, and health care. And nobody apparently stopped to ask whether in their zeal to poke a hole and implant themselves in the world’s digital systems, they were rendering America’s critical infrastructure—hospitals, cities, transportation, agriculture, manufacturing, oil and gas, defense; in short, everything that undergirds our modern lives—vulnerable to foreign attacks.

And nobody apparently stopped to ask whether in their zeal to poke a hole and implant themselves in the world’s digital systems, they were rendering America’s critical infrastructure—hospitals, cities, transportation, agriculture, manufacturing, oil and gas, defense; in short, everything that undergirds our modern lives—vulnerable to foreign attacks. There are no patents on vulnerabilities, exploits, and malware. If NSA found a way to exploit a digital system, there was a good chance that one day, months or years down the road, other bad actors would discover and exploit those very same weaknesses. The NSA’s answer to this moral hazard was more secrecy. So long as its tradecraft was highly classified and invisible, the agency could keep kicking the can down the road. Its critics argued that those classification levels did little to make Americans more secure; they only shielded the agency from further accountability, raised the stakes when its programs and tradecraft inevitably leaked into the public domain, and inspired others—not just the elite cyber powers—to join the game.

See also Tailored Access Operations (TAO) unit (NSA); specific companies; specific programs accountability, here ANT catalog, here, here, here backdoors acquired by, here budget, here, here, here in China, here cyberespionage, range of, here cyberwarriors in the, here cyberweapons and espionage operations, Russian use of, here, here cyberweapons stockpile, here eavesdropping apparatus, personal use of, here encryption, circumventing, here encryption capabilities, here enemies, underestimating, here ethics, here, here fatal flaw, here fourth-party collection efforts, here implant apparatus, here, here Information Assurance, here malware tools, here Merkel hack, here mission, here, here, here, here moral hazards, here Natanz nuclear plant exploit. see Natanz nuclear plant (Iran), U.S.-Israeli attack on oversight, here power, growth of, here recruiting, here, here Sandia, outsourcing to, here Snowden data leaks, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here surveillance technology, here, here, here upstream collection methods, here zero-day capability, here, here zero-day stockpiling, here, here, here, here, here, here, here, here NSA (National Security Agency) leaks ANT catalog, here decoy servers web addresses, here hacking tools / zero-days, here, here, here, here, here NSA (National Security Agency), zero-day exploits leaks, here, here, here, here used by foreign governments, here, here, here, here, here, here, here NSA National Computer Security Center (the Fort), here NSO Group (Israel) asking prices, here customers, here ethics, here mentioned, here Pegasus software, here, here, here Shadow Brokers compared, here surveillance technology, here, here zero-click infection method, here nuclear plants, security, here, here, here, here.


pages: 1,242 words: 317,903

The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

airline deregulation, airport security, Alan Greenspan, Alvin Toffler, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Bear Stearns, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, bond market vigilante , book value, Bretton Woods, business cycle, central bank independence, centralized clearinghouse, classic study, collateralized debt obligation, conceptual framework, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Dr. Strangelove, energy security, equity premium, fiat currency, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, forward guidance, full employment, Future Shock, Glass-Steagall Act, Greenspan put, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", junk bonds, Kenneth Rogoff, Kickstarter, Kitchen Debate, laissez-faire capitalism, Lewis Mumford, Long Term Capital Management, low interest rates, low skilled workers, market bubble, market clearing, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, Neil Armstrong, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, Phillips curve, plutocrats, popular capitalism, price stability, RAND corporation, Reminiscences of a Stock Operator, rent-seeking, Robert Shiller, Robert Solow, rolodex, Ronald Reagan, Saturday Night Live, Savings and loan crisis, savings glut, secular stagnation, short selling, stock buybacks, subprime mortgage crisis, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tipper Gore, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, We are all Keynesians now, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game

Whether Greenspan’s intervention had been good for global finance was of course a different question. Traditionalists were appalled by the expansion of moral hazard: the Fed chairman was guilty of “providing long-term financing to another country that has mismanaged its financial affairs,” St. Louis Fed president Thomas Melzer complained at the FOMC meeting at the start of February. A minority among the Fed’s staff experts gave this argument an extra twist, asserting that Greenspan could have fought harder for a Volcker-style solution that imposed losses on private creditors, thereby limiting moral hazard.28 The most telling criticism, advanced only in retrospect, was that Greenspan and the Treasury could have taken advantage of the fact that Mexico’s bonds had been issued under Mexican law.

But for Greenspan and the Treasury, there were risks in saying yes. The weakening of market discipline that results from any bailout would be replicated on an international scale. Just as Continental Illinois had been revealed to be too big to fail, so Mexico would now appear too big to fail, or too geopolitically important. The resulting “moral hazard”—the precedent suggesting that Wall Street could spray money at emerging markets and expect taxpayers to make good their losses—would be more toxic by far than anything that had happened during the third-world debt crises of the previous decade. Volcker had punished American bankers who lent foolishly: their repayments had been postponed and they had been forced to swallow losses.

Having rightly opposed the financial silos of the 1970s, the distortive interest-rate caps of Regulation Q, and the arguably outdated constraints of Glass-Steagall, he did not prove agile enough to pivot when the new leveraged finance demanded it. But on the positive side of the ledger, Greenspan had handled the immediate crisis well, expanding moral hazard as little as possible. He had talked up the markets and delivered a small interest-rate cut, but that was easily reversible. He had allowed the New York Fed to orchestrate LTCM’s rescue, but at least the Fed had not contributed taxpayer money to the effort—this was not a replay of Continental Illinois, when U.S. government funds were committed.


pages: 395 words: 116,675

The Evolution of Everything: How New Ideas Emerge by Matt Ridley

"World Economic Forum" Davos, adjacent possible, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, Alfred Russel Wallace, AltaVista, altcoin, An Inconvenient Truth, anthropic principle, anti-communist, bank run, banking crisis, barriers to entry, bitcoin, blockchain, Boeing 747, Boris Johnson, British Empire, Broken windows theory, carbon tax, Columbian Exchange, computer age, Corn Laws, cosmological constant, cotton gin, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, cryptocurrency, David Ricardo: comparative advantage, demographic transition, Deng Xiaoping, discovery of DNA, Donald Davies, double helix, Downton Abbey, driverless car, Eben Moglen, Edward Glaeser, Edward Lorenz: Chaos theory, Edward Snowden, endogenous growth, epigenetics, Ethereum, ethereum blockchain, facts on the ground, fail fast, falling living standards, Ferguson, Missouri, financial deregulation, financial innovation, flying shuttle, Frederick Winslow Taylor, Geoffrey West, Santa Fe Institute, George Gilder, George Santayana, Glass-Steagall Act, Great Leap Forward, Greenspan put, Gregor Mendel, Gunnar Myrdal, Henri Poincaré, Higgs boson, hydraulic fracturing, imperial preference, income per capita, indoor plumbing, information security, interchangeable parts, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jane Jacobs, Japanese asset price bubble, Jeff Bezos, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, Khan Academy, knowledge economy, land reform, Lao Tzu, long peace, low interest rates, Lyft, M-Pesa, Mahatma Gandhi, Mark Zuckerberg, means of production, meta-analysis, military-industrial complex, mobile money, Money creation, money: store of value / unit of account / medium of exchange, Mont Pelerin Society, moral hazard, Necker cube, obamacare, out of africa, packet switching, peer-to-peer, phenotype, Pierre-Simon Laplace, precautionary principle, price mechanism, profit motive, RAND corporation, random walk, Ray Kurzweil, rent-seeking, reserve currency, Richard Feynman, rising living standards, road to serfdom, Robert Solow, Ronald Coase, Ronald Reagan, Satoshi Nakamoto, scientific management, Second Machine Age, sharing economy, smart contracts, South Sea Bubble, Steve Jobs, Steven Pinker, Stuart Kauffman, tacit knowledge, TED Talk, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, twin studies, uber lyft, women in the workforce

It was ‘a system admirably calculated to economise the use of Capital to excite and cherish a spirit of useful Enterprise, and even to promote the moral habits of the people, by the direct inducements which it holds out to the maintenance of a character for industry, integrity and prudence’. In 1844 Peel, by now Prime Minister, tried again, and this time he managed effectively to buy the support of the chief Scottish banks by offering them a comfortable cartel in exchange for regulation by the Bank of England. The consequence was almost immediate. Under the morally hazardous umbrella of a central bank, irresponsible banking appeared in Scotland. By 1847, Scotland’s banks were indeed ‘fraught with ruin’ because of bad lending and needed bailing out by the Bank of England. Peel’s act had indeed ‘miscarried’, and was suspended. Malagrowther was absolutely right. Financial stability without central banks If Scotland is not to your taste, try Sweden.

Three countries – Panama, Ecuador and El Salvador – have ‘dollarised’ their economies, by deciding to use the dollar as their currency. This means, of course, that their banks are without a lender of last resort, because the US Fed is not likely to bail out a Panamanian bank. The consequence of this has been surprisingly positive. With moral hazard gone, the banks in the three dollarised countries have behaved cautiously, so much so that Panama’s banks are now considered highly stable, and the International Monetary Fund has stated that the very lack of a lender of last resort has ‘contributed to the resilience and stability of the system’.


pages: 453 words: 117,893

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bike sharing, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, export processing zone, Fall of the Berlin Wall, fear of failure, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, general purpose technology, Gini coefficient, Glass-Steagall Act, global supply chain, Great Leap Forward, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low interest rates, low-wage service sector, manufacturing employment, market bubble, means of production, middle-income trap, mittelstand, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, technological determinism, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

For his system to work effectively, there must be competition in the marketplace. But Smith also stipulated that such operations must be within the legislation and rules set by the government. The banking sector serves as a telling example. Smith believed that there should be competition among banks to reduce moral hazard, for example the possibility that banks might behave badly knowing they will be rescued. Government regulation could force banks to be more careful ‘by not extending their currency beyond its due proportion to their cash’.17 In other words, banks should depend on their cash and deposits for their lending operations and not get themselves in trouble by leveraging themselves in complicated ways.

Well-designed regulatory and supervisory powers play a role in preventing deflation by maintaining financial stability. They can act to rein in exuberant financing from dangerous financial innovations, practices and attitudes. Regulations and reforms are also needed alongside lender of last resort facilities to curb potential moral hazard problems. In other words, if the central bank is always there to bail a bank out, then a bank has less of an incentive to act prudently. Regulation can reduce this risk. In this respect, he would have welcomed the new macroprudential regulatory powers given to central banks after the 2008 financial crisis to target financial stability alongside their existing mandate of price stability.


pages: 374 words: 113,126

The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh

3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bike sharing, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, export processing zone, Fall of the Berlin Wall, fear of failure, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, general purpose technology, Gini coefficient, Glass-Steagall Act, global supply chain, Great Leap Forward, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low interest rates, manufacturing employment, market bubble, means of production, middle-income trap, mittelstand, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, technological determinism, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

For his system to work effectively, there must be competition in the marketplace. But Smith also stipulated that such operations must be within the legislation and rules set by the government. The banking sector serves as a telling example. Smith believed that there should be competition among banks to reduce moral hazard, for example the possibility that banks might behave badly knowing they will be rescued. Government regulation could force banks to be more careful ‘by not extending their currency beyond its due proportion to their cash’.17 In other words, banks should depend on their cash and deposits for their lending operations and not get themselves in trouble by leveraging themselves in complicated ways.

Well-designed regulatory and supervisory powers play a role in preventing deflation by maintaining financial stability. They can act to rein in exuberant financing from dangerous financial innovations, practices and attitudes. Regulations and reforms are also needed alongside lender of last resort facilities to curb potential moral hazard problems. In other words, if the central bank is always there to bail a bank out, then a bank has less of an incentive to act prudently. Regulation can reduce this risk. In this respect, he would have welcomed the new macroprudential regulatory powers given to central banks after the 2008 financial crisis to target financial stability alongside their existing mandate of price stability.


pages: 422 words: 113,830

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

"World Economic Forum" Davos, Alan Greenspan, algorithmic trading, asset-backed security, bank run, banking crisis, Bear Stearns, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, collateralized debt obligation, computer age, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial engineering, financial innovation, fixed income, Francis Fukuyama: the end of history, George Gilder, Glass-Steagall Act, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, junk bonds, Kenneth Rogoff, large denomination, Long Term Capital Management, low interest rates, market bubble, Martin Wolf, Menlo Park, Michael Milken, military-industrial complex, Minsky moment, mobile money, money market fund, Monroe Doctrine, moral hazard, mortgage debt, Myron Scholes, new economy, oil shale / tar sands, oil shock, old-boy network, peak oil, plutocrats, Ponzi scheme, profit maximization, prosperity theology / prosperity gospel / gospel of success, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Ronald Reagan, Satyajit Das, Savings and loan crisis, shareholder value, short selling, sovereign wealth fund, stock buybacks, subprime mortgage crisis, The Chicago School, Thomas Malthus, too big to fail, trade route

If we are headed into an era of rekindling government economic activism sufficient to resurrect an old term like “mercantilism” and embellish it with four, five, or six subcategories, then some greater precision may be in order. Take the three-decade pattern of bailouts extended by Federal Reserve chairman Ben Bernanke in his August-September minuet of full-fledged rate cuts, discount window enlargements, and emergency liquidity injections. The old pomposity “moral hazard” has lost relevance as “assets hazard” has become the feared bogeyman. Sometime back in the naive eighties, Milton Friedman rightly called banking “a major sector of the economy in which no enterprise ever fails, no one ever goes broke. . . . The banking industry has been a highly protected, sheltered industry.

Drexel University finance professor Joseph Mason told the Associated Press of bonds backed by delinquent credit card accounts in which up to 40 percent of the accounts in the security were rated AAA.10 However, institutional customers at home and abroad were clamoring for the high yields attached, and perceptions of “moral hazard” were minimal, especially in New York. The nation’s seventeenth-biggest bank based somewhere out in the hinterland might not rate a bailout, but Manhattan megabankers were confident of their own place on Helicopter Ben’s chopper route.b Indeed, New York’s Citigroup had already benefited from a bailout arranged by the Federal Reserve back in 1991.


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

Affordable Care Act / Obamacare, Alan Greenspan, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, Bernie Madoff, book value, 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, Future Shock, Glass-Steagall Act, government statistician, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, junk bonds, light touch regulation, Long Term Capital Management, low earth orbit, low interest rates, mega-rich, money market fund, moral hazard, mortgage debt, negative equity, Neil Armstrong, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, plutocrats, Ponzi scheme, price anchoring, price stability, proprietary trading, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Ronald Reagan, tail risk, too big to fail, trickle-down economics, value at risk, yield curve

It is (to use a fine Britishism) gobsmacking that the Bank of England is willing to further debauch the pound by quantitative easing, at a time when long-term bond yields, the target for such nontraditional measures, are already at record lows. ‘Moral hazard’ is a term much used in economics. It means that if you reward people for ineptitude or remove penalties from failure, you will encourage precisely the behaviors that you least want to see. Central bankers and regulators should be the fierce guardians of moral hazard: the angels with the flaming swords. They’ve become the exact reverse. One congressional inquiry, for example, saw the following interchange between Representative Alan Grayson and Elizabeth Coleman, the Fed’s Inspector General.


pages: 573 words: 115,489

Prosperity Without Growth: Foundations for the Economy of Tomorrow by Tim Jackson

"World Economic Forum" Davos, Alan Greenspan, bank run, banking crisis, banks create money, Basel III, basic income, biodiversity loss, bonus culture, Boris Johnson, business cycle, carbon footprint, Carmen Reinhart, Cass Sunstein, choice architecture, circular economy, collapse of Lehman Brothers, creative destruction, credit crunch, Credit Default Swap, critique of consumerism, David Graeber, decarbonisation, degrowth, dematerialisation, en.wikipedia.org, energy security, financial deregulation, Financial Instability Hypothesis, financial intermediation, full employment, Garrett Hardin, Glass-Steagall Act, green new deal, Growth in a Time of Debt, Hans Rosling, Hyman Minsky, impact investing, income inequality, income per capita, intentional community, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, liberal capitalism, low interest rates, Mahatma Gandhi, mass immigration, means of production, meta-analysis, Money creation, moral hazard, mortgage debt, Murray Bookchin, Naomi Klein, negative emissions, new economy, ocean acidification, offshore financial centre, oil shale / tar sands, open economy, paradox of thrift, peak oil, peer-to-peer lending, Philip Mirowski, Post-Keynesian economics, profit motive, purchasing power parity, quantitative easing, retail therapy, Richard Thaler, road to serfdom, Robert Gordon, Robert Solow, Ronald Reagan, science of happiness, secular stagnation, short selling, Simon Kuznets, Skype, smart grid, sovereign wealth fund, Steve Jobs, TED Talk, The Chicago School, The Great Moderation, The Rise and Fall of American Growth, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Tragedy of the Commons, universal basic income, Works Progress Administration, World Values Survey, zero-sum game

Roosevelt’s government passed something called the Glass Steagal Act, a showpiece of US legislation which forced a separation between commercial and investment banking. Basically, it stopped banks taking risks with their depositors’ money. In 1999, less than a decade before the crisis, the Gramm-Leach-Bliley Act overturned this separation. Realising that this put deposits at risk, governments began to introduce deposit guarantees. But this simply led to ‘moral hazard’ – the separation of risk from reward – and encouraged even more speculative behaviour. Securitisation of mortgage debts – another key element in the invisibility of subprime mortgage risk – compounded these risks. And securitisation was championed at the highest level, spearheaded by Alan Greenspan, former chairman of the Federal Reserve.

INDEX Locators in italic refer to figures absolute decoupling 84–6; historical perspectives 89–96, 90, 92, 94, 95; mathematical relationship with relative decoupling 96–101, 111 abundance see opulence accounting errors, decoupling 84, 91 acquisition, instinctive 68 see also symbolic role of goods adaptation: diminishing marginal utility 51, 68; environmental 169; evolutionary 226 advertising, power of 140, 203–4 Africa 73, 75–7; life-expectancy 74; philosophy 227; pursuit of western lifestyles 70; growth 99; relative income effect 58, 75; schooling 78 The Age of Turbulence (Greenspan) 35 ageing populations 44, 81 agriculture 12, 148, 152, 220 Aids/HIV 77 algebra of inequality see inequality; mathematical models alienation: future visions 212, 218–19; geographical community 122–3; role of the state 205; selfishness vs. altruism 137; signals sent by society 131 alternatives: economic 101–2, 139–40, 157–8; hedonism 125–6 see also future visions; post-growth macroeconomics; reform altruism 133–8, 196, 207 amenities see public services/amenities Amish community, North America 128 An Inquiry into the Nature and Causes of the Wealth of Nations (Smith) 123, 132 angelised growth see green growth animal welfare 220 anonymity/loneliness see alienation anthropological perspectives, consumption 70, 115 anti-consumerism 131 see also intrinsic values anxiety: fear of death 69, 104, 115, 212–15; novelty 116–17, 124, 211 Argentina 58, 78, 78, 80 Aristotle 48, 61 The Art of Happiness (Dalai Lama) 49 arts, Baumol’s cost disease 171–2 assets, stranded 167–8 see also ownership austerity policies xxxiii–xxxv, 189; and financial crisis 24, 42–3; mathematical models 181 Australia 58, 78, 128, 206 authoritarianism 199 autonomy see freedom/autonomy Ayres, Robert 143 backfire effects 111 balance: private interests/common good 208; tradition/innovation 226 Bank for International Settlements 46 bank runs 157 banking system 29–30, 39, 153–7, 208; bonuses 37–8 see also financial crisis; financial system basic entitlements: enterprise as service 142; income 67, 72–9, 74, 75, 76, 78; limits to growth 63–4 see also education; food; health Basu, Sanjay 43 Baumol, William 112, 147, 222, 223; cost disease 170, 171, 172, 173 BBC survey, geographical community 122–3 Becker, Ernest 69 Belk, Russ 70, 114 belonging 212, 219 see also alienation; community; intrinsic values Bentham, Jeremy 55 bereavement, material possessions 114, 214–15 Berger, Peter 70, 214 Berry, Wendell 8 Better Growth, Better Climate (New Climate Economy report) 18 big business/corporations 106–7 biodiversity loss 17, 47, 62, 101 biological perspectives see evolutionary theory; human nature/psyche biophysical boundaries see limits (ecological) Black Monday 46 The Body Economic (Stuckler and Basu) 43 bond markets 30, 157 bonuses, banking 37–8 Bookchin, Murray 122 boom-and-bust cycles 157, 181 Booth, Douglas 117 borrowing behaviour 34, 118–21, 119 see also credit; debt Boulding, Elise 118 Boulding, Kenneth 1, 5, 7 boundaries, biophysical see limits (ecological) bounded capabilities for flourishing 61–5 see also limits (flourishing within) Bowen, William 147 Bowling Alone (Putnam) 122 Brazil 58, 88 breakdown of community see alienation; social stability bubbles, economic 29, 33, 36 Buddhist monasteries, Thailand 128 buen vivir concept, Ecuador xxxi, 6 built-in obsolescence 113, 204, 220 Bush, George 121 business-as-usual model 22, 211; carbon dioxide emissions 101; crisis of commitment 195; financial crisis 32–8; growth 79–83, 99; human nature 131, 136–7; need for reform 55, 57, 59, 101–2, 162, 207–8, 227; throwaway society 113; wellbeing 124 see also financial systems Canada 75, 206, 207 capabilities for flourishing 61–5; circular flow of the economy 113; future visions 218, 219; and income 77; progress measures 50–5, 54; role of material abundance 67–72; and prosperity 49; relative income effect 55–61, 58, 71, 72; role of shame 123–4; role of the state 200 see also limits (flourishing within); wellbeing capital 105, 107–10 see also investment Capital in the 21st Century (Piketty) 33, 176, 177 Capital Institute, USA 155 capitalism 68–9, 80; structures 107–13, 175; types 105–7, 222, 223 car industry, financial crisis 40 carbon dioxide emissions see greenhouse gas emissions caring professions, valuing 130, 147, 207 see also social care Cat on a Hot Tin Roof (Williams) 213 causal path analysis, subjective wellbeing 59 Central Bank 154 central human capabilities 64 see also capabilities for flourishing The Challenge of Affluence (Offer) 194 change see alternatives; future visions; novelty/innovation; post-growth macroeconomics; reform Chicago school of economics 36, 156 children: advertising to 204; labour 62, 154; mortality 74–5, 75, 206 Chile xxxiii, xxxvii, 58, 74, 74, 75, 76 China: decoupling 88; GDP per capita 75; greenhouse gas emissions 91; growth 99; life expectancy 74; philosophy 7; post-financial crisis 45–6; pursuit of western lifestyles 70; relative income effect 58; resource use 94; savings 27; schooling 76 choice, moving beyond consumerism 216–18 see also freedom/autonomy Christian doctrine see religious perspectives chromium, commodity price 13 Cinderella economy 219–21, 224 circular economy 144, 220 circular flow of the economy 107, 113 see also engine of growth citizen’s income 207 see also universal basic income civil unrest see social stability Clean City Law, São Paulo 204 climate change xxxv, 22, 47; critical boundaries 17–20; decoupling 85, 86, 87, 98; fatalism 186; investment needs 152; role of the state 192, 198, 201–2 see also greenhouse gas emissions Climate Change Act (2008), UK 198 clothing see basic entitlements Club of Rome, Limits to Growth report xxxii, xxxiii, 8, 11–16, Cobb, John 54 collectivism 191 commercial bond markets 30, 157 commitment devices/crisis of 192–5, 197 commodity prices: decoupling 88; financial crisis 26; fluctuation/volatility 14, 21; resource constraints 13–14 common good: future visions 218, 219; vs. freedom and autonomy 193–4; vs. private interests 208; role of the state 209 common pool resources 190–2, 198, 199 see also public services/amenities communism 187, 191 community: future visions of 219–20; geographical 122–3; investment 155–6, 204 see also alienation; intrinsic values comparison, social 115, 116, 117 see also relative income effect competition 27, 112; positional 55–61, 58, 71, 72 see also struggle for existence complexity, economic systems 14, 32, 108, 153, 203 compulsive shopping 116 see also consumerism Conference of the Parties to the UN Framework Convention on Climate Change (CoP21) 19 conflicted state 197, 201, 209 connectedness, global 91, 227 conspicuous consumption 115 see also language of goods consumer goods see language of goods; material goods consumer sovereignty 196, 198 consumerism 4, 21, 22, 103–4, 113–16; capitalism 105–13, 196; choice 196; engine of growth 104, 108, 120, 161; existential fear of death 69, 212–15; financial crisis 24, 28, 39, 103; moving beyond 216–18; novelty and anxiety 116–17; post-growth economy 166–7; role of the state 192–3, 196, 199, 202–5; status 211; tragedy of 140 see also demand; materialism contemplative dimensions, simplicity 127 contraction and convergence model 206–7 coordinated market economies 27, 106 Copenhagen Accord (2009) 19 copper, commodity prices 13 corporations/big business 106–7 corruption 9, 131, 186, 187, 189 The Cost Disease: Why Computers get Cheaper and Health Care Doesn’t (Baumol) 171, 172 Costa Rica 74, 74, 76 countercyclical spending 181–2, 182, 188 crafts/craft economies 147, 149, 170, 171 creative destruction 104, 112, 113, 116–17 creativity 8, 79; and consumerism 113, 116; future visions 142, 144, 147, 158, 171, 200, 220 see also novelty/innovation credit, private: deflationary forces 44; deregulation 36; financial crisis 26, 27, 27–31, 34, 36, 41; financial system weaknesses 32–3, 37; growth imperative hypothesis 178–80; mortgage loans 28–9; reforms in financial system 157; spending vs. saving behaviour of ordinary people 118–19; and stimulation of growth 36 see also debt (public) credit unions 155–6 crises: of commitment 192–5; financial see financial crisis critical boundaries, biophysical see limits (ecological) Csikszentmihalyi, Mihalyi 127 Cuba: child mortality 75; life expectancy 74, 77, 78, 78; response to economic hardship 79–80; revolution 56; schooling 76 Cushman, Philip 116 Dalai Lama 49, 52 Daly, Herman xxxii, 54, 55, 160, 163, 165 Darwin, Charles 132–3 Das Kapital (Marx) 225 Davidson, Richard 49 Davos World Economic Forum 46 Dawkins, Richard 134–5 de Mandeville, Bernard 131–2, 157 death, denial of 69, 104, 115, 212–15 debt, public-sector 81; deflationary forces 44; economic stability 81; financial crisis 24, 26–32, 27, 37, 41, 42, 81; financial systems 28–32, 153–7; money creation 178–9; post-growth economy 178–9, 223 Debt: The First Five Thousand Years (Graeber) 28 decoupling xix, xx, xxxvii, 21, 84–7; dilemma of growth 211; efficiency measures 84, 86, 87, 88, 95, 104; green growth 163, 163–5; historical perspectives 87–96, 89, 90, 92, 94, 95; need for new economic model 101–2; relationship between relative and absolute 96–101 deep emission and resource cuts 99, 102 deficit spending 41, 43 deflationary forces, post-financial crisis 43–7, 45 degrowth movement 161–3, 177 demand 104, 113–16, 166–7; post-financial crisis 44–5; post-growth economy 162, 164, 166–9, 171–2, 174–5 dematerialisation 102, 143 democratisation, and wellbeing 59 deposit guarantees 35 deregulation 27, 34, 36, 196 desire, role in consumer behaviour 68, 69, 70, 114 destructive materialism 104, 112, 113, 116–17 Deutsche Bank 41 devaluation of currency 30, 45 Dichter, Ernest 114 digital economy 44, 219–20 dilemma of growth xxxi, 66–7, 104, 210; basic entitlements 72–9, 74, 75, 76, 78; decoupling 85, 87, 164; degrowth movement 160–3; economic stability 79–83, 174–6; material abundance 67–72; moving beyond 165, 166, 183–4; role of the state 198 diminishing marginal utility: alternative hedonism 125, 126; wellbeing 51–2, 57, 60, 73, 75–6, 79 disposable incomes 27, 67, 118 distributed ownership 223 Dittmar, Helga 126 domestic debt see credit dopamine 68 Dordogne, mindfulness community 128 double movement of society 198 Douglas, Mary 70 Douthwaite, Richard 178 downshifting 128 driving analogy, managing change 16–17 durability, consumer goods 113, 204, 220 dynamic systems, managing change 16–17 Eastern Europe 76, 122 Easterlin, Richard 56, 57, 59; paradox 56, 58 eco-villages, Findhorn community 128 ecological investment 101, 166–70, 220 see also investment ecological limits see limits (ecological) ecological (ecosystem) services 152, 169, 223 The Ecology of Money (Douthwaite) 178 economic growth see growth economic models see alternatives; business-as-usual model; financial systems; future visions; mathematical models; post-growth macroeconomics economic output see efficiency; productivity ‘Economic possibilities for our grandchildren’ (Keynes) 145 economic stability 22, 154, 157, 161; financial system weaknesses 34, 35, 36, 180; growth 21, 24, 67, 79–83, 174–6, 210; post-growth economy 161–3, 165, 174–6, 208, 219; role of the state 181–3, 195, 198, 199 economic structures: post-growth economy 227; financial system reforms 224; role of the state 205; selfishness 137 see also business-as-usual model; financial systems ecosystem functioning 62–3 see also limits (ecological) ecosystem services 152, 169, 223 Ecuador xxxi, 6 education: Baumol’s cost disease 171, 172; and income 67, 76, 76; investment in 150–1; role of the state 193 see also basic entitlements efficiency measures 84, 86–8, 95, 104, 109–11, 142–3; energy 41, 109–11; growth 111, 211; investment 109, 151; of scale 104 see also labour productivity; relative decoupling Ehrlich, Paul 13, 96 elasticity of substitution, labour and capital 177–8 electricity grid 41, 151, 156 see also energy Elgin, Duane 127 Ellen MacArthur Foundation 144 emissions see greenhouse gas emissions employee ownership 223 employment intensity vs. carbon dioxide emissions 148 see also labour productivity empty self 116, 117 see also consumerism ends above means 159 energy return on investment (EROI) 12, 169 energy services/systems 142: efficiency 41, 109–11; inputs/intensity 87–8, 151; investment 41, 109–10, 151–2; renewable xxxv, 41, 168–9 engine of growth 145; consumerism 104, 108, 161; services 143, 170–4 see also circular flow of the economy enough is enough see limits enterprise as service 140, 141–4, 158 see also novelty/innovation entitlements see basic entitlements entrepreneur as visionary 112 entrepreneurial state 220 Environmental Assessment Agency, Netherlands 62 environmental quality 12 see also pollution environmentalism 9 EROI (energy return on investment) 12, 169 Essay on the Principle of Population (Malthus) 9–11, 132–3 evolutionary map, human heart 136, 136 evolutionary theory 132–3; common good 193; post-growth economy 226; psychology 133–5; selfishness and altruism 196 exchange values 55, 61 see also gross domestic product existential fear of death 69, 104, 115, 212–15 exponential expansion 1, 11, 20–1, 210 see also growth external debt 32, 42 extinctions/biodiversity loss 17, 47, 62, 101 Eyres, Harry 215 Fable of the Bees (de Mandeville) 131–2 factor inputs 109–10 see also capital; labour; resource use fast food 128 fatalism 186 FCCC (Framework Convention on Climate Change) 92 fear of death, existential 69, 104, 115, 212–15 feedback loops 16–17 financial crisis (2008) 6, 23–5, 32, 77, 103; causes and culpability 25–8; financial system weaknesses 32–7, 108; Keynesianism 37–43, 188; nationalisation of financial sector 188; need for financial reforms 175; role of debt 24, 26–32, 27, 81, 179; role of state 191; slowing of growth 43–7, 45; spending vs. saving behaviour of ordinary people 118–21, 119; types/definitions of capitalism 106; youth unemployment 144–5 financial systems: common pool resources 192; debt-based/role of debt 28–32, 153–7; post-growth economy 179, 208; systemic weaknesses 32–7; and wellbeing 47 see also banking system; business-as-usual model; financial crisis; reform Findhorn community 128 finite limits of planet see limits (ecological) Fisher, Irving 156, 157 fishing rights 22 flourishing see capabilities for flourishing; limits; wellbeing flow states 127 Flynt, Larry 40 food 67 see also basic entitlements Ford, Henry 154 forestry/forests 22, 192 Forrester, Jay 11 fossil fuels 11, 20 see also oil Foucault, Michel 197 fracking 14, 15 Framework Convention on Climate Change (FCCC) 92 France: GDP per capita 58, 75, 76; inequality 206; life-expectancy 74; mindfulness community 128; working hours 145 free market 106: financial crisis 35, 36, 37, 38, 39; ideological controversy/conflict 186–7, 188 freedom/autonomy: vs. common good 193–4; consumer 22, 68–9; language of goods 212; personal choices for improvement 216–18; wellbeing 49, 59, 62 see also individualism Friedman, Benjamin 176 Friedman, Milton 36, 156, 157 frugality 118–20, 127–9, 215–16 fun (more fun with less stuff) 129, 217 future visions 2, 158, 217–21; community banking 155–6; dilemma of growth 211; enterprise as service 140, 141–4, 147–8, 158; entrepreneur as visionary 112; financial crisis as opportunity 25; and growth 165–6; investment 22, 101–2, 140, 149–53, 158, 169, 208; money as social good 140, 153–7, 158; processes of change 185; role of the state 198, 199, 203; timescales for change 16–17; work as participation 140, 144–9, 148, 158 see also alternatives; post-growth macroeconomics; reform Gandhi, Mahatma 127 GDP see gross domestic product gene, selfish 134–5 Genuine Progress Indicator (GPI) 54, 54 geographical community 122–3 Germany xxxi; Federal Ministry of Finance 224–5; inequality 206; relative income effect 58; trade balance 31; work as participation 146 Glass Steagal Act 35 Global Commodity Price Index (1992–2015) 13 global corporations 106–7 global economy 98: culture 70; decoupling 86–8, 91, 93–5, 95, 97, 98, 100; exponential expansion 20–1; inequality 4, 5–6; interconnectedness 91, 227; post-financial crisis slowing of growth 45 Global Research report (HSBC) 41 global warming see climate change Godley, Wynne 179 Goldman Sachs 37 good life 3, 6; moral dimension 63, 104; wellbeing 48, 50 goods see language of goods; material goods; symbolic role of goods Gordon, Robert 44 governance 22, 185–6; commons 190–2; crisis of commitment 192–5, 197; economic stability 34, 35; establishing limits 200–8, 206; growth 195–9; ideological controversy/conflict 186–9; moving towards change 197–200, 220–1; post-growth economy 181–3, 182; power of corporations 106; for prosperity 209; signals 130 government as household metaphor 30, 42 governmentality 197, 198 GPI (Genuine Progress Indicator) 54, 54 Graeber, David 28 Gramm-Leach-Bliley Act 35 Great Depression 39–40 Greece: austerity xxxiii–xxxiv, xxxvii, 43; energy inputs 88; financial crisis 28, 30, 31, 77; life expectancy 74; schooling 76; relative income effect 58; youth unemployment 144 Green Economy initiative 41 green: growth xxxvii, 18, 85, 153, 166, 170; investment 41 Green New Deal, UNEP 40–1, 152, 188 greenhouse gas emissions 18, 85, 86, 91, 92; absolute decoupling 89–92, 90, 92, 98–101, 100; dilemma of growth 210–11; vs. employment intensity 148; future visions 142, 151, 201–2, 220; Kyoto Protocol 18, 90; reduction targets 19–20; relative decoupling 87, 88, 89, 93, 98–101, 100 see also climate change Greenspan, Alan 35 gross domestic product (GDP) per capita 3–5, 15, 54; climate change 18; decoupling 85, 93, 94; financial crisis 27, 28, 32; green growth 163–5; life expectancy 74, 75, 78; as measure of prosperity 3–4, 5, 53–5, 54, 60–1; post-financial crisis 43, 44; post-growth economy 207; schooling 76; wellbeing 55–61, 58 see also income growth xxxvii; capitalism 105; credit 36, 178–80; decoupling 85, 96–101; economic stability 21, 24, 67, 80, 210; financial crisis 37, 38; future visions 209, 223, 224; inequality 177; labour productivity 111; moving beyond 165, 166; novelty 112; ownership 105; post-financial crisis slowing 43–7, 45; prosperity as 3–7, 23, 66; role of the state 195–9; sustainable investment 166–70; wellbeing 59–60; as zero sum game 57 see also dilemma of growth; engine of growth; green growth; limits to growth; post-growth macroeconomy growth imperative hypothesis 37, 174, 175, 177–80, 183 habit formation, acquisition as 68 Hall, Peter 106, 188 Hamilton, William 134 Hansen, James 17 happiness see wellbeing/happiness Happiness (Layard) 55 Hardin, Garrett 190–1 Harvey, David 189, 192 Hayek, Friedrich 187, 189, 191 health: Baumol’s cost disease 171, 172; inequality 72–3, 205–6, 206; investment 150–1; and material abundance 67, 68; personal choices for improvement 217; response to economic hardship 80; role of the state 193 see also basic entitlements Heath, Edward 66, 82 hedonism 120, 137, 196; alternatives 125–6 Hirsch, Fred xxxii–xxxiii historical perspectives: absolute decoupling 86, 89–96, 90, 92, 94, 95; relative decoupling 86, 87–9, 89 Holdren, John 96 holistic solutions, post-growth economy 175 household finances: house purchases 28–9; spending vs. saving behaviour 118–20, 119 see also credit household metaphor, government as 30, 42 HSBC Global Research report 41 human capabilities see capabilities for flourishing human happiness see wellbeing/happiness human nature/psyche 3, 132–5, 138; acquisition 68; alternative hedonism 125; evolutionary map of human heart 136, 136; intrinsic values 131; meaning/purpose 49–50; novelty/innovation 116; selfishness vs. altruism 133–8; short-termism/living for today 194; spending vs. saving behaviour 34, 118–21, 119; symbolic role of goods 69 see also intrinsic values human rights see basic entitlements humanitarian perspectives: financial crisis 24; growth 79; inequality 5, 52, 53 see also intrinsic values hyperbolic discounting 194 hyperindividualism 226 see also individualism hyper-materialisation 140, 157 I Ching (Chinese Book of Changes) 7 Iceland: financial crisis 28; life expectancy 74, 75; relative income effect 56; response to economic hardship 79–80; schooling 76; sovereign money system 157 identity construction 52, 69, 115, 116, 212, 219 IEA (International Energy Agency) 14, 152 IMF (International Monetary Fund) 45, 156–7 immaterial goods 139–40 see also intrinsic values; meaning/purpose immortality, symbolic role of goods 69, 104, 115, 212–14 inclusive growth see inequality; smart growth income 3, 4, 5, 66, 124; basic entitlements 72–9, 74, 75, 76, 78; child mortality 74–5, 75; decoupling 96; economic stability 82; education 76; life expectancy 72, 73, 74, 77–9, 78; poor nations 67; relative income effect 55–61, 58, 71, 72; tax revenues 81 see also gross domestic product INDCs (intended nationally determined commitments) 19 India: decoupling 99; growth 99; life expectancy 74, 75; philosophy 127; pursuit of western lifestyles 70; savings 27; schooling 76 indicators of environmental quality 96 see also biodiversity; greenhouse gas emissions; pollution; resource use individualism 136, 226; progressive state 194–7, 199, 200, 203, 207 see also freedom/autonomy industrial development 12 see also technological advances inequality 22, 67; basic entitlements 72; child mortality 75, 75; credible alternatives 219, 224; deflationary forces 44; fatalism 186; financial crisis 24; global 4, 5–6, 99, 100; financial system weaknesses 32–3; post-growth economy 174, 176–8; role of the state 198, 205–7, 206; selfishness vs. altruism 137; symbolic role of goods 71; wellbeing 47, 104 see also poverty infant mortality rates 72, 75 inflation 26, 30, 110, 157, 167 infrastructure, civic 150–1 Inglehart, Ronald 58, 59 innovation see novelty/innovation; technological advances inputs 80–1 see also capital; labour productivity; resource use Inside Job documentary film 26 instant gratification 50, 61 instinctive acquisition 68 Institute for Fiscal Studies 81 Institute for Local Self-Reliance 204 institutional structures 130 see also economic structures; governance intended nationally determined commitments (INDCs) 19 intensity factor, technological 96, 97 see also technological advances intentional communities 127–9 interconnectedness, global 91, 227 interest payments/rates 39, 43, 110; financial crisis 29, 30, 33, 39; post-growth economy 178–80 see also credit; debt Intergovernmental Panel on Climate Change (IPCC) 18, 19, 201–2 International Energy Agency (IEA) 14, 152 International Monetary Fund (IMF) 45, 156–7 intrinsic values 126–31, 135–6, 212; role of the state 199, 200 see also belonging; community; meaning/purpose; simplicity/frugality investment 107–10, 108; ecological/sustainable 101, 152, 153, 166–70, 220; and innovation 112; loans 29; future visions 22, 101–2, 140, 149–53, 158, 169, 208, 220; and savings 108; social 155, 156, 189, 193, 208, 220–3 invisible hand metaphor 132, 133, 187 IPAT equation, relative and absolute decoupling 96 IPCC (Intergovernmental Panel on Climate Change) 18, 19, 201–2 Ireland 28; inequality 206; life expectancy 74, 75; schooling 76; wellbeing 58 iron cage of consumerism see consumerism iron ore 94 James, Oliver 205 James, William 68 Japan: equality 206; financial crisis 27, 45; life expectancy 74, 76, 79; relative income effect 56, 58; resource use 93; response to economic hardship 79–80 Jefferson, Thomas 185 Jobs, Steve 210 Johnson, Boris 120–1 Kahneman, Daniel 60 Kasser, Tim 126 keeping up with the Joneses 115, 116, 117 see also relative income effect Kennedy, Robert 48, 53 Keynes, John Maynard/Keynesianism 23, 34, 120, 174, 181–3, 187–8; financial crisis 37–43; financial system reforms 157; part-time working 145; steady state economy 159, 162 King, Alexander 11 Krugman, Paul 39, 85, 86, 102 Kyoto Protocol (1992) 18, 90 labour: child 62, 154; costs 110; division of 158; elasticity of substitution 177, 178; intensity 109, 148, 208; mobility 123; production inputs 80, 109; structures of capitalism 107 labour productivity 80–1, 109–11; Baumol’s cost disease 170–2; and economic growth 111; future visions 220, 224; investment as commitment 150; need for investment 109; post-growth economy 175, 208; services as engine of growth 170; sustainable investment 166, 170; trade off with resource use 110; work-sharing 145, 146, 147, 148, 148, 149 Lahr, Christin 224–5 laissez-faire capitalism 187, 195, 196 see also free market Lakoff, George 30 language of goods 212; material footprint of 139–40; signalling of social status 71; and wellbeing 124 see also consumerism; material goods; symbolic role of goods Layard, Richard 55 leadership, political 199 see also governance Lebow, Victor 120 Lehman Brothers, bankruptcy 23, 25, 26, 118 leisure economy 204 liberal market economies 106, 107; financial crisis 27, 35–6 life expectancy: and income 72, 73, 74, 77–9, 78; inequality 206; response to economic hardship 80 see also basic entitlements life-satisfaction 73; inequality 205; relative income effect 55–61, 58 see also wellbeing/happiness limits, ecological 3, 4, 7, 11, 12, 20–2; climate change 17–20; decoupling 86; financial crisis 23–4; growth 21, 165, 210; post-growth economy 201–2, 226–7; role of the state 198, 200–2, 206–7; and social boundaries 141; wellbeing 62–63, 185 limits, flourishing within 61–5, 185; alternative hedonism 125–6; intrinsic values 127–31; moving towards 215, 218, 219, 221; paradox of materialism 121–23; prosperity 67–72, 113, 212; role of the state 201–2, 205; selfishness 131–8; shame 123–4; spending vs. saving behaviour 118–21, 119 see also sustainable prosperity limits to growth: confronting 7–8; exceeding 20–2; wellbeing 62–3 Limits to Growth report (Club of Rome) xxxii, xxxiii, 8, 11–16 ‘The Living Standard’ essay (Sen) 50, 123–4 living standards 82 see also prosperity Lloyd, William Forster 190 loans 154; community investment 155–6; financial system weaknesses 34 see also credit; debt London School of Economics 25 loneliness 123, 137 see also alienation long-term: investments 222; social good 219 long-term wellbeing vs. short-term pleasures 194, 197 longevity see life expectancy love 212 see also intrinsic values low-carbon transition 19, 220 LowGrow model for the Canadian economy 175 MacArthur Foundation 144 McCracken, Grant 115 Malthus, Thomas Robert 9–11, 132–3, 190 market economies: coordinated 27, 106; liberal 27, 35–6, 106, 107 market liberalism 106, 107; financial crisis 27, 35–6; wellbeing 47 marketing 140, 203–4 Marmot review, health inequality in the UK 72 Marx, Karl/Marxism 9, 189, 192, 225 Massachusetts Institute of Technology (MIT) 11, 12, 15 material abundance see opulence material goods 68–9; identity 52; language of 139–40; and wellbeing 47, 48, 49, 51, 65, 126 see also symbolic role of goods material inputs see resource use materialism: and fear of death 69, 104, 115, 212–15; and intrinsic values 127–31; paradox of 121–3; price of 126; and religion 115; values 126, 135–6 see also consumerism mathematical models/simulations 132; austerity policies 181; countercyclical spending 181–2, 182; decoupling 84, 91, 96–101; inequality 176–8; post-growth economy 164; stock-flow consistent 179–80 Mawdsley, Emma 70 Mazzucato, Mariana 193, 220 MDG (Millennium Development Goals) 74–5 Meadows, Dennis and Donella 11, 12, 15, 16 meaning/purpose 2, 8, 22; beyond material goods 212–16; consumerism 69, 203, 215; intrinsic values 127–31; moving towards 218–20; wellbeing 49, 52, 60, 121–2; work 144, 146 see also intrinsic values means and ends 159 mental health: inequality 206; meaning/purpose 213 metaphors: government as household 30, 42; invisible hand 132, 133, 187 Middle East, energy inputs 88 Miliband, Ed 199 Mill, John Stuart 125, 159, 160, 174 Millennium Development Goals (MDG) 74–5 mindfulness 128 Minsky, Hyman 34, 35, 40, 182, 208 MIT (Massachusetts Institute of Technology) 11, 12, 15 mixed economies 106 mobility of labour, loneliness index 123 Monbiot, George 84, 85, 86, 91 money: creation 154, 157, 178–9; and prosperity 5; as social good 140, 153–7, 158 see also financial systems monopoly power, corporations 106–7 The Moral Consequences of Economic Growth (Friedman) 82, 176 moral dimensions, good life 63 see also intrinsic values moral hazards, separation of risk from reward 35 ‘more fun with less stuff’ 129, 217 mortality fears 69, 104, 115, 212–15 mortality rates, and income 74, 74–6, 75 mortgage loans 28–9, 35 multinational corporations 106–7 national debt see debt, public-sector nationalisation 191; financial crisis 38, 188 natural selection 132–3 see also struggle for existence nature, rights of 6–7 negative emissions 98–9 negative feedback loops 16–17 Netherlands 58, 62, 206, 207 neuroscientific perspectives: flourishing 68, 69; human behaviour 134 New Climate Economy report Better Growth, Better Climate 18 New Deal, USA 39 New Economics Foundation 175 nickel, commodity prices 13 9/11 terrorist attacks (2001) 121 Nordhaus, William 171, 172–3 North America 128, 155 see also Canada; United States Norway: advertising 204; inequality 206; investment as commitment 151–2; life expectancy 74; relative income effect 58; schooling 76 novelty/innovation 104, 108, 113; and anxiety 116–17, 124, 211; crisis of commitment 195; dilemma of growth 211; human psyche 135–6, 136, 137; investment 150, 166, 168; post-growth economy 226; role of the state 196, 197, 199; as service 140, 141–4, 158; symbolic role of goods 114–16, 213 see also technological advances Nudge: Improving Decisions about Health, Wealth, and Happiness (Thaler and Sunstein) 194–5 Nussbaum, Martha 64 nutrient loading, critical boundaries 17 nutrition 67 see also basic entitlements obesity 72, 78, 206 obsolescence, built in 113, 204, 220 oceans: acidification 17; common pool resources 192 Offer, Avner 57, 61, 71, 194, 195 oil prices 14, 21; decoupling 88; financial crisis 26; resource constraints 15 oligarchic capitalism 106, 107 opulence 50–1, 52, 67–72 original sin 9, 131 Ostrom, Elinor and Vincent 190, 191 output see efficiency; gross domestic product; productivity ownership: and expansion 105; private vs. public 9, 105, 191, 219, 223; new models 223–4; types/definitions of capitalism 105–7 Oxfam 141 paradoxes: materialism 121–3; thrift 120 Paris Agreement 19, 101, 201 participation in society 61, 114, 122, 129, 137; future visions 200, 205, 218, 219, 225; work as 140–9, 148, 157, 158 see also social inclusion part-time working 145, 146, 149, 175 Peccei, Aurelio 11 Perez, Carlota 112 performing arts, Baumol’s cost disease 171–2 personal choice 216–18 see also freedom/autonomy personal property 189, 191 Pickett, Kate 71, 205–6 Piketty, Thomas 33, 176, 177 planetary boundaries see limits (ecological) planning for change 17 pleasure 60–1 see also wellbeing/happiness Plum Village mindfulness community 128 Polanyi, Karl 198 policy see governance political leadership 199 see also governance Political Economy Research Institute, University of Massachusetts 41 pollution 12, 21, 53, 95–6, 143 polycentric governance 191, 192 Poor Laws 10 poor nations see poverty population increase 3, 12, 63, 96, 97, 190; Malthus on 9–11, 132–3 porn industry 40 Portugal 28, 58, 88, 206 positional competition 55–61, 58, 71, 72 see also social comparison positive feedback loops 16–17 post-growth capitalism 224 post-growth macroeconomics 159–60, 183–4, 221; credit 178–80; degrowth movement 161–3; economic stability 174–6; green growth 163–5; inequality 176–8; role of state 181–3, 182, 200–8, 206; services 170–4; sustainable investment 166–70 see also alternatives; future visions; reform poverty 4, 5–6, 216; basic entitlements 72; flourishing within limits 212; life expectancy 74, 74; need for new economic model 101; symbolic role of goods 70; wellbeing 48, 59–60, 61, 67 see also inequality; relative income effect power politics 200 predator–prey analogy 103–4, 117 private credit see credit private vs. public: common good 208; ownership 9, 105, 191, 219, 223; salaries 130 privatisation 191, 219 product lifetimes, obsolescence 113, 204, 220 production: inputs 80–1; ownership 191, 219, 223 productivity: investment 109, 167, 168, 169; post-growth economy 224; services as engine of growth 171, 172, 173; targets 147; trap 175 see also efficiency measures; labour productivity; resource productivity profits: definitions of capitalism 105; dilemma of growth 211; efficiency measures 87; investment 109; motive 104; post-growth economy 224; and wages 175–8 progress 2, 50–5, 54 see also novelty/innovation; technological advances progressive sector, Baumol’s cost disease 171 progressive state 185, 220–2; contested 186–9; countering consumerism 202–5; equality measures 205–7, 206; governance of the commons 190–2; governance as commitment device 192–5; governmentality of growth 195–7; limit-setting 201–2; moving towards 197–200; post-growth macroeconomics 207–8, 224; prosperity 209 prosocial behaviour 198 see also social contract prosperity 1–3, 22, 121; capabilities for flourishing 61–5; and growth 3–7, 23, 66, 80, 160; and income 3–4, 5, 66–7; limits of 67–72, 113, 212; materialistic vision 137; progress measures 50–5, 54; relative income effect 55–61, 58, 71, 72; social perspectives 2, 22, 48–9; state roles 209 see also capabilities for flourishing; post-growth macroeconomics; sustainable prosperity; wellbeing prudence, financial 120, 195, 221; financial crisis 33, 34, 35 public sector spending: austerity policies 189; countercyclical spending strategy 181–2, 182; welfare economy 169 public services/amenities: common pool resources 190–2, 198, 199; future visions 204, 218–20; investment 155–6, 204; ownership 223 see also private vs. public; service-based economies public transport 41, 129, 193, 217 purpose see meaning/purpose Putnam, Robert 122 psyche, human see human nature/psyche quality, environmental 12 see also pollution quality of life: enterprise as service 142; inequality 206; sustainable 128 quality to throughput ratios 113 quantitative easing 43 Queen Elizabeth II 25, 32, 34, 37 quiet revolution 127–31 Raworth, Kate 141 Reagan, Ronald 8 rebound phenomenon 111 recession 23–4, 28, 81, 161–3 see also financial crisis recreation/leisure industries 143 recycling 129 redistribution of wealth 52 see also inequality reforms 182–3, 222; economic structures 224; and financial crisis 103; financial systems 156–8, 180 see also alternatives; future visions; post-growth economy relative decoupling 84–5, 86; historical perspectives 87–9, 89; relationship with absolute decoupling 96–101, 111 relative income effect 55–61, 58, 71, 72 see also social comparison religious perspectives 9–10, 214–15; materialism as alternative to religion 115; original sin 9, 131; wellbeing 48, 49 see also existential fear of death renewable energy xxxv, 41, 168–169 repair/renovation 172, 220 resource constraints 3, 7, 8, 11–15, 47 resource productivity 110, 151, 168, 169, 220 resource use: conflicts 22; credible alternatives 101, 220; decoupling 84–9, 92–5, 94, 95; and economic output 142–4; investment 151, 153, 168, 169; trade off with labour costs 110 retail therapy 115 see also consumerism; shopping revenues, state 222–3 see also taxation revolution 186 see also social stability rights: environment/nature 6–7; human see basic entitlements risk, financial 24, 25, 33, 35 The Road to Serfdom (Hayek) 187 Robinson, Edward 132 Robinson, Joan 159 Rockström, Johan 17, 165 romantic movement 9–10 Roosevelt, Franklin D. 35, 39 Rousseau, Jean Jacques 9, 131 Russia 74, 76, 77–80, 78, 122 sacred canopy 214, 215 salaries: private vs. public sector 130, 171; and profits 175–8 Sandel, Michael 150, 164, 218 São Paulo, Clean City Law 204 Sardar, Zia 49, 50 Sarkozy, Nicolas xxxi, 53 savage state, romantic movement 9–10 savings 26–7, 28, 107–9, 108; investment 149; ratios 34, 118–20, 119 scale, efficiencies of 104 Scandinavia 27, 122, 204 scarcity, managing change 16–17 Schumpeter, Joseph 112 Schwartz, Shalom 135–6, 136 schooling see education The Science of Desire (Dichter) 114 secular stagnation 43–7, 45, 173 securitisation, mortgage loans 35 security: moving towards 219; and wellbeing 48, 61 self-development 204 self-expression see identity construction self-transcending behaviours see transcendence The Selfish Gene (Dawkins) 134–5 selfishness 133–8, 196 Sen, Amartya 50, 52, 61–2, 123–4 service concept/servicization 140–4, 147–8, 148, 158 service-based economies 219; engine of growth 170–4; substitution between labour and capital 178; sustainable investment 169–70 see also public services SFC (stock-flow consistent) economic models 179–80 shame 123–4 shared endeavours, post-growth economy 227 Sheldon, Solomon 214 shelter see basic entitlements shopping 115, 116, 130 see also consumerism short-termism/living for today 194, 197, 200 signals: sent out by society 130, 193, 198, 203, 207; social status 71 see also language of goods Simon, Julian 13 simplicity/simple life 118–20, 127–9, 215–16 simulations see mathematical models/simulations slow: capital 170; movement 128 smart growth 85, 163–5 see also green growth Smith, Adam 51, 106–7, 123, 132, 187 social assets 220 social boundaries (minimum standards) 141 see also basic entitlements social care 150–1 see also caring professions social comparison 115, 116, 117 see also relative income effect social contract 194, 198, 199, 200 social inclusion 48, 69–71, 114, 212 see also participation in society social investment 155, 156, 189, 193, 208, 220–3 social justice 198 see also inequality social logic of consumerism 114–16, 204 social stability 24, 26, 80, 145, 186, 196, 205 see also alienation social status see status social structures 80, 129, 130, 137, 196, 200, 203 social tolerance, and wellbeing 59, 60 social unrest see social stability social wage 40 social welfare: financial reforms 182–3; public sector spending 169 socialism 223 Sociobiology (Wilson) 134 soil integrity 220 Solon, quotation 47, 49, 71 Soper, Kate 125–6 Soros, George 36 Soskice, David 106 Soviet Union, former 74, 76, 77–80, 78, 122 Spain 28, 58, 144, 206 SPEAR organization, responsible investment 155 species loss/extinctions 17, 47, 62, 101 speculation 93, 99, 149, 150, 154, 158, 170; economic stability 180; financial crisis 26, 33, 35; short-term profiteering 150; spending: behaviour of ordinary people 34, 119, 120–1; countercyclical 181–2, 182, 188; economic stability 81; as way out of recession 41, 44, 119, 120–1; and work cycle 125 The Spirit Level (Wilkinson and Pickett) 71, 205–6 spiritual perspectives 117, 127, 128, 214 stability see economic stability; social stability stagflation 26 stagnant sector, Baumol’s cost disease 171 stagnation: economic stability 81–2; labour productivity 145; post-financial crisis 43–7, 45 see also recession state capitalism, types/definitions of capitalism 106 state revenues, from social investment 222–3 see also taxation state roles see governance status 207, 209, 211; and possessions 69, 71, 114, 115, 117 see also language of goods; symbolic role of goods Steady State Economics (Daly) xxxii steady state economies 82, 159, 160, 174, 180 see also post-growth macroeconomics Stern, Nicholas 17–18 stewardship: role of the state 200; sustainable investment 168 Stiglitz, Joseph 53 stock-flow consistent (SFC) economic models 179–80 Stockholm Resilience Centre 17, 201 stranded assets 167–8 see also ownership structures of capitalism see economic structures struggle for existence 8–11, 125, 132–3 Stuckler, David 43 stuff see language of goods; material goods; symbolic role of goods subjective wellbeing (SWB) 49, 58, 58–9, 71, 122, 129 see also wellbeing/happiness subprime lending 26 substitution, between labour and capital 177–178 suffering, struggle for existence 10 suicide 43, 52, 77 Sukdhev, Pavan 41 sulphur dioxide pollution 95–6 Summers, Larry 36 Sunstein, Cass 194 sustainability xxv–xxvi, 102, 104, 126; financial systems 154–5; innovation 226; investment 101, 152, 153, 166–70, 220; resource constraints 12; role of the state 198, 203, 207 see also sustainable prosperity Sustainable Development Strategy, UK 198 sustainable growth see green growth sustainable prosperity 210–12; creating credible alternatives 219–21; finding meaning beyond material commodities 212–16; implications for capitalism 222–5; personal choices for improvement 216–18; and utopianism 225–7 see also limits (flourishing within) SWB see subjective wellbeing; wellbeing/happiness Switzerland 11, 46, 157; citizen’s income 207; income relative to wellbeing 58; inequality 206; life expectancy 74, 75 symbolic role of goods 69, 70–1; existential fear of death 212–16; governance 203; innovation/novelty 114–16; material footprints 139–40; paradox of materialism 121–2 see also language of goods; material goods system dynamics model 11–12, 15 tar sands/oil shales 15 taxation: capital 177; income 81; inequality 206; post-growth economy 222 technological advances 12–13, 15; decoupling 85, 86, 87, 96–8, 100–3, 164–5; dilemma of growth 211; economic stability 80; population increase 10–11; role of state 193, 220 see also novelty/innovation Teilhard de Chardin, Pierre 8 terror management, and consumption 69, 104, 115, 212–15 terrorist attacks (9/11) 121 Thailand, Buddhist monasteries 128 Thaler, Richard 194 theatre, Baumol’s cost disease 171–2 theology see religious perspectives theory of evolution 132–3 thermodynamics, laws of 112, 164 Thich Nhat Hanh 128 thrift 118–20, 127–9, 215–16 throwaway society 113, 172, 204 timescales for change 16–17 tin, commodity prices 13 Today programme interview xxix, xxviii Totnes, transition movement 128–9 Towards a Green Economy report (UNEP) 152–3 Townsend, Peter 48, 61 trade balance 31 trading standards 204 tradition 135–6, 136, 226 ‘Tragedy of the commons’ (Hardin) 190–1 transcendence 214 see also altruism; meaning/purpose; spiritual perspectives transition movement, Totnes 128–9 Triodos Bank 156, 165 Trumpf (machine-tool makers) Germany 146 trust, loss of see alienation tungsten, commodity prices 13 Turkey 58, 88 Turner, Adair 157 21st Conference of the Parties to the UN Framework Convention on Climate Change (2015) 19 UBS (Swiss bank) 46 Ubuntu, African philosophy 227 unemployment 77; consumer goods 215; degrowth movement 162; financial crisis 24, 40, 41, 43; Great Depression 39–40; and growth 38; labour productivity 80–1; post-growth economy 174, 175, 183, 208, 219; work as participation 144–6 United Kingdom: Green New Deal group 152; greenhouse gas emissions 92; labour productivity 173; resource inputs 93; Sustainable Development Strategy 198 United Nations: Development Programme 6; Environment Programme 18, 152–3; Green Economy initiative 41 United States: credit unions 155–6; debt 27, 31–32; decoupling 88; greenhouse gas emissions 90–1; subprime lending 26; Works Progress Administration 39 universal basic income 221 see also citizen’s income University of Massachusetts, Political Economy Research Institute 41 utilitarianism/utility, wellbeing 50, 52–3, 55, 60 utopianism 8, 38, 125, 179; post-growth economy 225–7 values, materialistic 126, 135–6 see also intrinsic values Veblen, Thorstein 115 Victor, Peter xxxviii, 146, 175, 177, 180 vision of progress see future visions; post-growth economy volatility, commodity prices 14, 21 wages: and profits 175–8; private vs. public sector 130, 171 walking, personal choices for improvement 217 water use 22 Wealth of Nations, An Inquiry into the Nature and Causes (Smith) 123, 132 wealth redistribution 52 see also inequality Weber, Axel 46 welfare policies: financial reforms 182–3; public sector spending 169 welfare of livestock 220 wellbeing/happiness 47–50, 53, 121–2, 124; collective 209; consumer goods 4, 21, 22, 126; growth 6, 165, 211; intrinsic values 126, 129; investment 150; novelty/innovation 117; opulence 50–2, 67–72; personal choices for improvement 217; planetary boundaries 141; relative income effect 55–61, 58, 71, 72; simplicity 129; utilitarianism 50, 52–3, 55, 60 see also capabilities for flourishing western lifestyles 70, 210 White, William 46 Whybrow, Peter 68 Wilhelm, Richard 7 Wilkinson, Richard 71, 205–6 Williams, Tennessee 213 Wilson, Edward 134 wisdom traditions 48, 49, 63, 128, 213–14 work: as participation 140–9, 148, 157, 158; and spend cycle 125; sharing 145, 146, 149, 175 Works Progress Administration, USA 39 World Bank 160 World Values Survey 58 youth unemployment, financial crisis 144–5 zero sum game, growth as 57, 71


pages: 396 words: 113,613

Chokepoint Capitalism by Rebecca Giblin, Cory Doctorow

Aaron Swartz, AltaVista, barriers to entry, Berlin Wall, Bernie Sanders, Big Tech, big-box store, Black Lives Matter, book value, collective bargaining, commoditize, coronavirus, corporate personhood, corporate raider, COVID-19, disintermediation, distributed generation, Fairchild Semiconductor, fake news, Filter Bubble, financial engineering, Firefox, forensic accounting, full employment, gender pay gap, George Akerlof, George Floyd, gig economy, Golden age of television, Google bus, greed is good, green new deal, high-speed rail, Hush-A-Phone, independent contractor, index fund, information asymmetry, Jeff Bezos, John Gruber, Kickstarter, laissez-faire capitalism, low interest rates, Lyft, Mark Zuckerberg, means of production, microplastics / micro fibres, Modern Monetary Theory, moral hazard, multi-sided market, Naomi Klein, Network effects, New Journalism, passive income, peak TV, Peter Thiel, precision agriculture, regulatory arbitrage, remote working, rent-seeking, ride hailing / ride sharing, Robert Bork, Saturday Night Live, shareholder value, sharing economy, Silicon Valley, SoftBank, sovereign wealth fund, Steve Jobs, Steven Levy, stock buybacks, surveillance capitalism, Susan Wojcicki, tech bro, tech worker, The Chicago School, The Wealth of Nations by Adam Smith, TikTok, time value of money, transaction costs, trickle-down economics, Turing complete, Uber and Lyft, uber lyft, union organizing, Vanguard fund, vertical integration, WeWork

The idea is for the partners to exit after three to five years with a fat capital profit, having pocketed hefty advisory and management fees along the way. These deals are structured to give the fund an outsized return in the event the investment goes well and insulate them from the downside if it fails. Experts Eileen Appelbaum and Rosemary Batt describe this as a classic case of “moral hazard,” because “the general partner who makes the decision to load the portfolio company with debt that it is obligated to repay bears very little of the potential costs associated with those risks.”14 Because private equity firms are so much better at capturing value than creating it, carnage often follows.

., 50 Discovery Network, 215 Disney, 2, 161–62, 172, 212–13 Doctorow, Cory, 34, 116, 227 domain spoofing, 49 DoorDash, 166–67 DOS, 201 DRM (digital rights management), 25–28, 33–34, 37–38, 119, 120, 121 Drummond, David, 127 Dryhurst, Mat, 67, 220, 238 eBay, 40 ebooks market, 24–33, 37–38, 238 ecology movement, 251 economic rents, 118–21 The Economics of Imperfect Competition (Robinson), 10 Ek, Daniel, 84 Electronic Frontier Foundation, 202, 209 Epic Games, 115–18, 119–20 Epidemic Sound, 81–82 European Union: App Drivers and Couriers Union, 171; competition regulation, 233–34; Copyright Directive (2019), 195; dispute resolution, 166–67; General Data Protection Regulation (GDPR), 136–39, 144, 171, 231; payment data disclosure, 162, 164; press publishers’ right, 233–34; pro-creator policies, 257; remuneration legislation, 214 The Everything Store (Stone), 21 Excel, 201 Facebook, 2, 18, 45–51 Fairchild Semiconductor, 165–66 Fair Labor Standards Act, 150 fair use/dealing, 130, 189 film scoring, 215 Forbes, 47 Fortnite Battle Royale, 115–18 Foster, Alan Dean, 161–62, 212–13, 215 France, 233 freedom of contract, 184 free market, 118–21 Freire, Paulo, 237 Friedman, Milton, 152, 153, 252 Frisch, Kevin, 48 Game Workers Unite (GWU), 239 gaming industry, 115–18, 239 Gates, Rebecca, 3 Gateway, 201 Gaye, Marvin, 63–64 Gazelle Project, 21 General Data Protection Regulation (GDPR), 136–39, 144, 231 geography, and labor market, 15–16 Germany, 214 Getty Images, 229 Gibbs, Melvin, 3 Giblin, Rebecca, 186, 187, 193, 194 gig economy companies, 249 Gilded Age, 178–79 Gioia, Ted, 64 Glatt, Zoë, 133 Glazier, Mitch, 186 Goldenfein, Jake, 235 Goodman, David, 106, 175, 176 Google: about, 2, 7, 10, 15, 18; in Australia, 235; Content ID system, 129–35; and Epic Games, 116, 117; and General Data Protection Regulation (GDPR), 136–39; news and advertising, 42–45; News Showcase, 234; streaming share, 83; third-party cookies, 232; YouTube acquisition, 125–29, 134 Google Classroom, 210 Green, Joshua, 124 Green, Matthew, 209 Hachette, 23, 28 Haggard, Merle, 166 Harcourt, Amanda, 70, 83 hate, and profits, 95 health insurance, 249, 256 Herndon, Holly, 66–67 Hind, Dan, 244 hip-hop, 61 horizontal integration, 45, 46, 57, 69–70, 97 Howard, George, 82 HP, 199 Huang, Andrew, 209 Hundt, Reed, 90 Hurley, Chad, 124, 128 Hwang, Tim, 46, 50 IBM, 149, 201 ICM Partners, 104 iHeartMedia, 18, 56, 90, 91, 94 Imeem, 133 independent cinema, 242 indyreads, 241–42 information, 14 Intel, 166 International Confederation of Authors and Composers Society, 67 interoperability: adversarial, 201–3; competitive compatibility (comcom), 202–4, 206–11; computer universality, 197–99; digital lock-in, 196–97; DMCA and, 199; as essential, 120; interoperator’s defense, 210; mandated, 204–6; physical lock-in, 196; video streaming, 198; virtual machines, 198; voluntary, 200–201 iWork, 202 Japan Fair Trade Commission, 258 Jay-Z, 2, 160 Jennings, Tom, 201 Jensen, Rich, 237 job guarantees, 251–56 Johannessen, Chip, 105 Johnson, Dennis, 21–22 Johnson, Paul, 78 Kanopy, 242 Kanter, Jonathan, 147 Karim, Jawed, 124 Karp, Irwin, 184 Kates, Mark, 62 Keating, Zoë, 66, 68 Kelten, Stephanie, 255 Khan, Lina, 6, 147 Kindle ebook store, 26–34, 37–38 Kindle Unlimited, 159–60 Kirkwood, John, 173 Klein, Naomi, 152, 254 Knowledge Ecology International, 153 Kobalt, 73 Kowal, Mary Robinette, 212–13 Kun, Josh, 59 labor, 5–6, 253–54 labor, job guarantees, 251–56 labor market and geography, 15–16 LaPolt, Dina, 61 lending right, public, 242–44 Leonard, Christopher, 96 leveraged buyouts, 91–93 libraries, 35–36, 241–44 Linda, Solomon, 188 “The Lion Sleeps Tonight” (song), 188 literary agents, 23 litigation costs, 166–67 live music industry: grind and difficulties of, 97–98; Live Nation consolidation of, 98–103; scalping, 98, 100 Live Nation: about, 2, 18, 56; antitrust remedies, 148; domination of industry, 97–103 Livingstone, Bruce, 229 local public ownership models, 239–42 location data, 50 Lofgren, Zoe, 209 Lotus 1-2-3, 201 Love, Courtney, 53 Love, James, 153 Lovett, Lyle, 53 Lyft, 249 Lynn, Barry, 22 Lynskey, Orla, 15 Macmillan, 30 Maker Studios, 133 Malamud, Carl, 130 mandated interoperability, 204–6 Manne Seminars, 103 market power, 13–14 Marrakesh Treaty to Facilitate Access to Published Works for Persons Who Are Blind, Visually Impaired or Otherwise Print Disabled, 153 Marshall, Josh, 43 Marx, Paris, 239 May, Susan, 154, 156, 158–59 Medicare for All, 256 Meese, James, 232, 235 Melville House Publishing, 21–22 Merlin, 71–72, 77 # Me Too, 47 Microchip Technology, 166 Microsoft, 201 middlemen, 46 Mills, Martin, 59 Minogue, Kylie, 3 moats, corporate, 6–7, 136 monopolies, 3–6, 9–10, 11–12, 118–19, 146, 256–59; maintenance of monopoly, 58 Monopolized! (Dayen), 94 monopsonies, 9–11, 16, 22, 28, 31, 38, 151–53 Monsanto, 96 moral hazard, 91 Morgenstern, Jay, 183 Morton, Fiona Scott, 50 Motion Twin, 239 music industry: antitrust remedies, 149; catalog control, 60–61; CD sales, 24; copyright reversion and, 191–92; internet effects on, 55–57; labels and artists’ contracts, 52–55, 57–60, 63–65; labels’ power and profits, 76–77; music publishers, 69–70; public lending right and, 243; songwriters, 69–70; works for hire and copyright, 185–86, 187 Music Licensing Collective, 160 Music Managers Forum, 225 Music Modernization Act, 160, 219–20, 225 music streaming industry: collections and distribution systems, 223–28; created by labels, 67–68; incremental change, 259; labels-services contracts, 70–77; legacy contracts and copyrights, 56–65; licensing, 217–23; licensing regulation and complexity, 83–84, 227–28; local public ownership, 239–42; major versus independent artist play, 85; market size, 83; music licensing, 217–23; noninteractive licensing, 217–18; profitability, 76; protest platforms, 237–39; public lending right, 243; royalties and rates, 66, 68–69, 221–22; Spotify model and major labels, 73–75; Spotify playlists, 78–84; statutory licensing, 220–28; transactional transparency, 160; user-centric model, 68–69; YouTube, 135 National Labor Relations Act, 150 NBC Universal, 5 Netflix, 160, 174–75, 215 Netherlands, 214 network effect moats, 6, 142–43 New Deal, 152, 254 New Jersey, 236 Newmark, Craig, 39 News Corporation, 133 news industry: ad revenue, 40; Australian regulation, 233, 234–35; classified ads, 40; co-ops and advertising, 231–33; decline of, 40–42, 46–47; Facebook and, 45–51; Google and, 42–45; public funding, 236–37; subscriptions, 233 News Media Bargaining Code, 233 News Showcase, 234 noncompete agreements, 165, 200, 247 NPO, 231 Office suite, 201 Ola, 171 oligarchy, 102–3 Oracle v.


pages: 394 words: 124,743

Overhaul: An Insider's Account of the Obama Administration's Emergency Rescue of the Auto Industry by Steven Rattner

activist fund / activist shareholder / activist investor, affirmative action, Alan Greenspan, bank run, banking crisis, Bear Stearns, business cycle, Carl Icahn, centre right, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, creative destruction, credit crunch, David Brooks, David Ricardo: comparative advantage, declining real wages, Ford Model T, friendly fire, hiring and firing, income inequality, Joseph Schumpeter, low skilled workers, McMansion, Mikhail Gorbachev, moral hazard, Ronald Reagan, Saturday Night Live, shareholder value, subprime mortgage crisis, supply-chain management, too big to fail

For many months, Wall Street was in a muddle about what it wanted Washington to do. In March 2008, when the Fed saved Bear Stearns, many in the financial community were dismayed. "Moral hazard!" they cried. "Poorly run institutions must be allowed to fail!" For the next few months, markets continued to erode only gradually, with the acute pain confined to those in the subprime mortgage arena. But then came the crisis of September 2008. "The Street" wanted the government to let Lehman go—a notch in the moral-hazard belt—and the Federal Reserve and the Bush administration obliged. But from that horrible Monday morning when we awoke to Lehman's bankruptcy—the firm at which I enjoyed beginning my Wall Street career and at which I still had many friends—it was clear that things would never be the same.


pages: 497 words: 123,718

A Game as Old as Empire: The Secret World of Economic Hit Men and the Web of Global Corruption by Steven Hiatt; John Perkins

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "World Economic Forum" Davos, accelerated depreciation, addicted to oil, airline deregulation, Andrei Shleifer, Asian financial crisis, Berlin Wall, big-box store, Bob Geldof, book value, Bretton Woods, British Empire, capital controls, centre right, clean water, colonial rule, corporate governance, corporate personhood, deglobalization, deindustrialization, disinformation, Doha Development Round, energy security, European colonialism, export processing zone, financial deregulation, financial independence, full employment, global village, high net worth, land bank, land reform, large denomination, liberal capitalism, Long Term Capital Management, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, military-industrial complex, moral hazard, Naomi Klein, new economy, North Sea oil, offshore financial centre, oil shock, Ponzi scheme, race to the bottom, reserve currency, Ronald Reagan, Scramble for Africa, Seymour Hersh, statistical model, structural adjustment programs, Suez crisis 1956, Tax Reform Act of 1986, too big to fail, trade liberalization, transatlantic slave trade, transfer pricing, union organizing, Washington Consensus, working-age population, Yom Kippur War

• As for sovereign country borrowers, in 1953, under the impact of the Cold War and the desire to see Western Europe recover, the U.S. helped to arrange a generous debt restructuring for West Germany, including a 50-percent debt write-off and a thirty-year repayment schedule for the balance owed. In short, when it comes to debt relief—“sanctity of contract,” “moral hazard,” and other neoliberal canons notwithstanding—if the borrowers in question are large enough and have enough political influence, they have usually qualified for exceptional treatment. This offshore labor force sends home a stream of remittance income now estimated at up to $250 billion each year.

These demands were especially hard to justify in light of the fact that HIPCs on the final list were hardly prime prospects for First World banks, contractors, or equipment suppliers. Fully half had populations smaller than New Jersey’s, with per capita incomes averaging less than $1,100, and average life expectancies of just forty-nine years. Offering this group of countries debt relief was not likely to set a dangerous “moral hazard” precedent. Nevertheless, under the original 1996 HIPC I scheme, all these countries expected to spend three years implementing such reforms under the BWIs’ watchful eye before they reached a “decision point.” Then a debt-relief package would be assembled and a modest amount of relief would finally be approved.


pages: 320 words: 87,853

The Black Box Society: The Secret Algorithms That Control Money and Information by Frank Pasquale

Adam Curtis, Affordable Care Act / Obamacare, Alan Greenspan, algorithmic trading, Amazon Mechanical Turk, American Legislative Exchange Council, asset-backed security, Atul Gawande, bank run, barriers to entry, basic income, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, bonus culture, Brian Krebs, business cycle, business logic, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chelsea Manning, Chuck Templeton: OpenTable:, cloud computing, collateralized debt obligation, computerized markets, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, data science, Debian, digital rights, don't be evil, drone strike, Edward Snowden, en.wikipedia.org, Evgeny Morozov, Fall of the Berlin Wall, Filter Bubble, financial engineering, financial innovation, financial thriller, fixed income, Flash crash, folksonomy, full employment, Gabriella Coleman, Goldman Sachs: Vampire Squid, Google Earth, Hernando de Soto, High speed trading, hiring and firing, housing crisis, Ian Bogost, informal economy, information asymmetry, information retrieval, information security, interest rate swap, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, John Bogle, Julian Assange, Kevin Kelly, Kevin Roose, knowledge worker, Kodak vs Instagram, kremlinology, late fees, London Interbank Offered Rate, London Whale, machine readable, Marc Andreessen, Mark Zuckerberg, Michael Milken, mobile money, moral hazard, new economy, Nicholas Carr, offshore financial centre, PageRank, pattern recognition, Philip Mirowski, precariat, profit maximization, profit motive, public intellectual, quantitative easing, race to the bottom, reality distortion field, recommendation engine, regulatory arbitrage, risk-adjusted returns, Satyajit Das, Savings and loan crisis, search engine result page, shareholder value, Silicon Valley, Snapchat, social intelligence, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, technological solutionism, the scientific method, too big to fail, transaction costs, two-sided market, universal basic income, Upton Sinclair, value at risk, vertical integration, WikiLeaks, Yochai Benkler, zero-sum game

Treasury “saved” AIG, infusing the firm with capital— over $100 billion— and paying its obligations to firms like Goldman at 100 cents on the dollar, despite the fact that there was no government guarantee of the value of CDSes. Amazingly, the government did not use its leverage at the 116 THE BLACK BOX SOCIETY moment of crisis to penalize AIG counterparties. Deeply concerned about “moral hazard” in other situations, officials at Treasury and the Fed made the bettors whole rather than teaching them a lesson about overleveraging. For a real “learning moment,” for example, Treasury could have imposed numerous conditions designed to assure the banks acted in the best interest of the citizens whose tax dollars rescued them.

Russell, Social Insecurity: 401(k)s and the Retirement Crisis (Boston: Beacon Press, 2014); Robin Blackburn, Banking on Death (London: Verso, 2004). 278 NOTES TO PAGES 133–135 146. Peter Boone and Simon Johnson describe how a “doomsday cycle” of privatized gains and socialized losses continues to this day. Peter Boone and Simon Johnson, “Will the Politics of Global Moral Hazard Sink Us Again?,” in The Future of Finance. See also Paul De Grauwe and Yuemei Ji, “Strong Government, Weak Banks,” CEPS Policy Brief No. 305, November 25, 2013, http:// www.ceps.eu /ceps/dld /8646/pdf (and note how those “earning” the most at banks want them weak; a strong institution would do more to limit their pay). 147.


pages: 824 words: 218,333

The Gene: An Intimate History by Siddhartha Mukherjee

Albert Einstein, Alfred Russel Wallace, All science is either physics or stamp collecting, Any sufficiently advanced technology is indistinguishable from magic, Asilomar, Asilomar Conference on Recombinant DNA, autism spectrum disorder, Benoit Mandelbrot, butterfly effect, CRISPR, dark matter, discovery of DNA, double helix, Drosophila, epigenetics, Ernest Rutherford, experimental subject, Gregor Mendel, Internet Archive, invisible hand, Isaac Newton, longitudinal study, medical residency, military-industrial complex, moral hazard, mouse model, New Journalism, out of africa, phenotype, Pierre-Simon Laplace, planned obsolescence, Ponzi scheme, Ralph Waldo Emerson, Recombinant DNA, Scientific racism, seminal paper, stem cell, The Bell Curve by Richard Herrnstein and Charles Murray, Thomas Malthus, twin studies

In these matters, indeed, the gardener in his garden is our symbol and our guide.” In the last years of his life, Galton wrestled with the idea of negative eugenics. He never made complete peace with it. The “sterilization of failures”—the weeding and culling of the human genetic garden—haunted him with its many implicit moral hazards. But in the end, his desire to build eugenics into a “national religion” outweighed his qualms about negative eugenics. In 1909, he founded a journal, the Eugenics Review, which endorsed not just selective breeding but selective sterilization. In 1911, he produced a strange novel, entitled Kantsaywhere, about a future utopia in which roughly half the population was marked as “unfit” and severely restricted in its ability to reproduce.

Who would ensure that genetic technologies would not be seized and perverted by powerful forces—as once before on that continent? Berg had obviously stoked an old fire. In America, the prospect of gene manipulation had principally raised the specter of future biological dangers. In Italy—not more than a few hundred miles from the sites of the former Nazi extermination camps—it was the moral hazards of genetics, more than the biohazards of genes, that haunted the conversation. That evening, a German student gathered an impromptu group of his peers to continue the debate. They climbed the ramparts of the Venus Castle and looked out toward the darkening coast, with the lights of the city blinking below.

Although these tests seem to detect chromosomal abnormalities, such as Down syndrome, with just as much fidelity as amniocentesis, a major issue of the test is “false positives”—i.e., the fetal DNA is thought to carry a chromosomal abnormality, but it is actually normal. These false positive rates will decrease dramatically as technologies advance. III. Even seemingly simple scenarios of genetic screening force us to enter arenas of unnerving moral hazard. Take Friedman’s example of using a blood test to screen soldiers for genes that predispose to PTSD. At first glance, such a strategy would seem to mitigate the trauma of war: soldiers incapable of “fear extinction” might be screened and treated with intensive psychiatric therapies or medical therapies to return them to normalcy.


pages: 154 words: 48,340

What We Need to Do Now: A Green Deal to Ensure a Habitable Earth by Chris Goodall

blockchain, carbon footprint, carbon tax, circular economy, decarbonisation, energy transition, Extinction Rebellion, food miles, green new deal, Greta Thunberg, Haber-Bosch Process, hydroponic farming, Intergovernmental Panel on Climate Change (IPCC), it's over 9,000, Kickstarter, microplastics / micro fibres, moral hazard, Naomi Klein, negative emissions, Ocado, ocean acidification, plant based meat, smart grid, smart meter

They point out the risks of unexpected effects, particularly from large experiments that affect the amount of solar radiation arriving at the surface, and note that scientists do not fully understand the climate system nor can predict what will happen. But, whatever our concerns about the possible disruption to rainfall, it needs to be pointed out that global heating is already hugely affecting where and how much it rains. Professor Joanna Haigh, a leading climate scientist, says that geoengineering also introduces ‘moral hazard’. If we rely on it to reduce the risks of climate breakdown, the strength of our commitment to cutting out fossil fuels may be weakened. Scientists like her tend to worry that we will use any excuse we can find to avoid the difficulties of transforming our societies so that our emissions fall to zero.


Making Globalization Work by Joseph E. Stiglitz

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Andrei Shleifer, Asian financial crisis, banking crisis, barriers to entry, benefit corporation, Berlin Wall, blood diamond, business process, capital controls, carbon tax, central bank independence, corporate governance, corporate social responsibility, currency manipulation / currency intervention, Doha Development Round, Exxon Valdez, Fall of the Berlin Wall, Firefox, full employment, Garrett Hardin, Gini coefficient, global reserve currency, Global Witness, Great Leap Forward, Gunnar Myrdal, happiness index / gross national happiness, illegal immigration, income inequality, income per capita, incomplete markets, Indoor air pollution, informal economy, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), inventory management, invisible hand, John Markoff, Jones Act, Kenneth Arrow, Kenneth Rogoff, low interest rates, low skilled workers, manufacturing employment, market fundamentalism, Martin Wolf, microcredit, moral hazard, negative emissions, new economy, North Sea oil, offshore financial centre, oil rush, open borders, open economy, price stability, profit maximization, purchasing power parity, quantitative trading / quantitative finance, race to the bottom, reserve currency, rising living standards, risk tolerance, Seymour Hersh, Silicon Valley, special drawing rights, statistical model, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, Tragedy of the Commons, trickle-down economics, union organizing, Washington Consensus, zero-sum game

In some instances, governments even assumed private liabilities, effectively socializing private risk. The creditors were let off the hook, but the IMF’s money wasn’t a gift, just another loan—and the developing country was left to pay the bill. In effect, the poor country’s taxpayers paid for the rich country’s lending mistakes. The bail-outs give rise to the famous “moral hazard” problem. Moral hazard arises when a party does not bear all the risks associated with his action and as a result does not do everything he can to avoid the risk. The term originates in the insurance literature; it was deemed immoral for an individual to take less care in preventing a fire simply because he had insurance coverage.


pages: 503 words: 131,064

Liars and Outliers: How Security Holds Society Together by Bruce Schneier

Abraham Maslow, airport security, Alvin Toffler, barriers to entry, behavioural economics, benefit corporation, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, commoditize, corporate governance, crack epidemic, credit crunch, CRISPR, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, desegregation, don't be evil, Double Irish / Dutch Sandwich, Douglas Hofstadter, Dunbar number, experimental economics, Fall of the Berlin Wall, financial deregulation, Future Shock, Garrett Hardin, George Akerlof, hydraulic fracturing, impulse control, income inequality, information security, invention of agriculture, invention of gunpowder, iterative process, Jean Tirole, John Bogle, John Nash: game theory, joint-stock company, Julian Assange, language acquisition, longitudinal study, mass incarceration, meta-analysis, microcredit, mirror neurons, moral hazard, Multics, mutually assured destruction, Nate Silver, Network effects, Nick Leeson, off-the-grid, offshore financial centre, Oklahoma City bombing, patent troll, phenotype, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, profit motive, race to the bottom, Ralph Waldo Emerson, RAND corporation, Recombinant DNA, rent-seeking, RFID, Richard Thaler, risk tolerance, Ronald Coase, security theater, shareholder value, slashdot, statistical model, Steven Pinker, Stuxnet, technological singularity, The Market for Lemons, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Timothy McVeigh, too big to fail, traffic fines, Tragedy of the Commons, transaction costs, ultimatum game, UNCLOS, union organizing, Vernor Vinge, WikiLeaks, World Values Survey, Y2K, Yochai Benkler, zero-sum game

Whether it's Citibank selling credit cards and consumer loans and anti-theft protection plans to go with those credit cards; or Apple selling computer hardware and software; or Verizon bundling telephone, cable, and Internet; product bundles and subscription services hide prices and make it harder for customers to make buying decisions. There's also a moral hazard here. The less Citibank spends on antifraud measures, the more protection plans it can sell; the higher its credit card interest rates, the more attractive its consumer loans are. Large corporations can also use one revenue stream to subsidize another. So a big-box retail store can temporarily lower its prices so far that it's losing money, in order to drive out competition.

But as long as the maximum possible penalty to the corporation is bankruptcy, there will be illegal activities that are perfectly rational to undertake as long as the probability of penalty is small enough.20 Any company that is too big to fail—that the government will bail out rather than let fail—is the beneficiary of a free insurance policy underwritten by taxpayers. So while a normal-sized company would evaluate both the costs and benefits of defecting, a too-big-to-fail company knows that someone else will pick up the costs. This is a moral hazard that radically changes the risk trade-off, and limits the effectiveness of institutional pressure. Of course, I'm not saying that all corporations will make these calculations and do whatever illegal activity is under consideration. There are still both moral and reputational pressures in place that keep both individuals and corporations from defecting.


pages: 457 words: 143,967

The Bank That Lived a Little: Barclays in the Age of the Very Free Market by Philip Augar

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Bonfire of the Vanities, bonus culture, book value, break the buck, business logic, call centre, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, family office, financial deregulation, financial innovation, fixed income, foreign exchange controls, Glass-Steagall Act, high net worth, hiring and firing, index card, index fund, interest rate derivative, light touch regulation, loadsamoney, Long Term Capital Management, long term incentive plan, low interest rates, Martin Wolf, money market fund, moral hazard, Nick Leeson, Northern Rock, offshore financial centre, old-boy network, out of africa, prediction markets, proprietary trading, quantitative easing, risk free rate, Ronald Reagan, shareholder value, short selling, Sloane Ranger, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, too big to fail, vertical integration, wikimedia commons, yield curve

He was an academic economist of high standards – a Fellow of the British Academy, the UK’s top club for humanities scholars – and tax expert who had joined the Bank of England as chief economist in 1991 and become deputy governor in 1998. Reflecting widely held economic theory, he believed that the banking sector was strong enough to withstand the impact of taking mortgage backed securities on to balance sheets; that the private sector would re-establish valuations; and that to step in prematurely would encourage ‘moral hazard’, the perception among financial institutions that they would be protected from the consequences of their actions by a government safety net.21 It was the direct opposite of the view Diamond had put forward but the careful reader would have noted the penultimate paragraph of the governor’s letter: ‘lender of last resort operations remain in the armoury of all central banks.’22 THE RUN ON THE ROCK The lender of last resort’s role is to provide loans to institutions on the verge of collapse and when King wrote that letter he had already agreed with the Treasury and the FSA that the Bank of England would if necessary stand behind Northern Rock.

In the midst of all this angst, in his office in Portcullis House next to the House of Commons, Treasury Committee chairman John McFall MP studied the letter he had just received from Governor King. The governor’s confidence in the ability of the banking system to withstand shocks and his concerns about moral hazard already looked out of date; King’s ‘steady as we go’ position was not one the government could hold. On Monday 17 September Chancellor Alistair Darling announced the guarantee of all existing deposits with Northern Rock.25 Two days later, to alleviate strain in longer-term money markets, the Bank of England announced it would provide three-month funds against a wide range of collateral.


pages: 448 words: 142,946

Sacred Economics: Money, Gift, and Society in the Age of Transition by Charles Eisenstein

Albert Einstein, back-to-the-land, bank run, Bernie Madoff, big-box store, bread and circuses, Bretton Woods, capital controls, carbon credits, carbon tax, clean water, collateralized debt obligation, commoditize, corporate raider, credit crunch, David Ricardo: comparative advantage, debt deflation, degrowth, deindustrialization, delayed gratification, disintermediation, diversification, do well by doing good, fiat currency, financial independence, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, full employment, global supply chain, God and Mammon, happiness index / gross national happiness, hydraulic fracturing, informal economy, intentional community, invisible hand, Jane Jacobs, land tenure, land value tax, Lao Tzu, Lewis Mumford, liquidity trap, low interest rates, McMansion, means of production, megaproject, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, multilevel marketing, new economy, off grid, oil shale / tar sands, Own Your Own Home, Paul Samuelson, peak oil, phenotype, planned obsolescence, Ponzi scheme, profit motive, quantitative easing, race to the bottom, Scramble for Africa, special drawing rights, spinning jenny, technoutopianism, the built environment, Thomas Malthus, too big to fail, Tragedy of the Commons

By ensuring the solvency of risk-taking financial institutions and the liquidity of their financial offerings, the government has effectively increased the risk-free rewards of owning money and accelerated the concentration of wealth. No longer is the Fed Funds rate or T-bill rate the benchmark of risk-free interest. The concept of moral hazard that has come up in the context of “too big to fail” financial institutions isn’t just a moral issue. When risky, high-interest bets are not actually risky, then those with the money to make such bets will increase their wealth far faster than (and at the expense of) everyone else. Moral hazard is a shortcut to extreme concentration of wealth. 7. The conservative argument that putting money in the hands of the wealthy will spur increased investment, more jobs, and prosperity for all holds only if the rate of return on capital so invested exceeds the prevailing interest rate on risk-free financial investment.


pages: 828 words: 232,188

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

Affordable Care Act / Obamacare, Andrei Shleifer, Asian financial crisis, Atahualpa, banking crisis, barriers to entry, Berlin Wall, blood diamond, British Empire, centre right, classic study, clean water, collapse of Lehman Brothers, colonial rule, conceptual framework, Cornelius Vanderbilt, cotton gin, crony capitalism, Day of the Dead, deindustrialization, Deng Xiaoping, disruptive innovation, 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, Glass-Steagall Act, Great Leap Forward, Hernando de Soto, high-speed rail, Home mortgage interest deduction, household responsibility system, income inequality, information asymmetry, invention of the printing press, iterative process, Kickstarter, knowledge worker, labour management system, land reform, land tenure, life extension, low interest rates, low skilled workers, manufacturing employment, means of production, Menlo Park, Mohammed Bouazizi, Monroe Doctrine, moral hazard, Nelson Mandela, new economy, open economy, out of africa, Peace of Westphalia, Port of Oakland, post-industrial society, post-materialism, price discrimination, quantitative easing, RAND corporation, rent-seeking, road to serfdom, Ronald Reagan, scientific management, Scientific racism, Scramble for Africa, Second Machine Age, Silicon Valley, special economic zone, stem cell, subprime mortgage crisis, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, too big to fail, trade route, transaction costs, Twitter Arab Spring, Tyler Cowen, Tyler Cowen: Great Stagnation, Vilfredo Pareto, women in the workforce, work culture , World Values Survey, zero-sum game

Many American conservatives denounced President Obama’s 2010 Affordable Care Act as “socialism,” but the fact was that at the time, the United States was alone among rich democratic countries in the world in not having some form of mandated universal health insurance. Liberal theorists from John Locke to Friedrich Hayek have always been skeptical of government-mandated redistribution, since it threatens to reward the lazy and incompetent at the expense of the virtuous and hardworking. And indeed, all redistributive programs incur what economists call “moral hazard”: by rewarding people based on their level of income rather than their individual effort, the government discourages work. This was of course the case in former Communist countries such as the Soviet Union, where “the government pretended to pay us and we pretended to work.” On the other hand, it is morally difficult to justify a minimalist state that provides no safety net whatsoever for its less fortunate citizens.

This would work only in a society where the playing field was always perfectly level, and in which accidents of birth or simple luck had no role in determining the life chances, wealth, and opportunities faced by individuals. But such a society has never existed in the past, and does not exist today. The real question facing most governments, then, is less whether to redistribute than at what level to do so, and how to redistribute in ways that minimize moral hazard. The problem of inherited advantages usually increases over time. Elites tend to get more entrenched because they can use their wealth, power, and social status to get access to the government, and to use the power of the state to protect themselves and their children. This process will continue until nonelites succeed in mobilizing politically to reverse it or otherwise protect themselves.

Hart Mexican-American War Mexican Revolution Mexico; PRI in; War of Independence in Middle Ages middle classes; in Argentina; in Brazil; in China; clientelism and; conversion of working class into; corruption and; defining; and future of democracy; size of, relative to rest of society Middle East; compared with nineteenth-century Europe Migdal, Joel Miguel, Edward military competition military conquest, geography and military slavery Mill, James Mill, John Stuart Mobutu Sese Seko modernization; classic path to; national identity and; without development; see also industrialization Modi, Narendra Moi, Daniel arap Moltke, Helmuth von Mondell, Frank Mongols Monroe, James Montesquieu, Charles Secondat, Baron de Montezuma Monti, Mario Moore, Barrington moral hazard Morel, E. D. Morelos, José María Morrill Act Morris, Edmund Morris, Ian Morsi, Mohamed Mosca, Gaetano Mozambique Mubarak, Hosni Muir, John Munn v. Illinois Museveni, Yoweri Muslims, see Islam Mussolini, Benito Napoleon I, Emperor Napoleon III, Emperor Napoleonic Wars National Association for the Advancement of Colored People (NAACP) national character nationalism, see nation building and national identity Nationalism, Islam, and Marxism (Sukarno) National Security Agency nation building and national identity; and adjusting identities to fit political realities; cultural assimilation and; and defining of political borders; four routes to; historical amnesia and; in Indonesia; in Kenya; in Latin America; linguistic unification and; modernization and; and moving or eliminating populations; in Nigeria; state building and; in Tanzania; in United States; violence and NATO Nazis neopatrimonialism Netherlands New Deal New York, N.Y.


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This Changes Everything: Capitalism vs. The Climate by Naomi Klein

"World Economic Forum" Davos, 1960s counterculture, activist fund / activist shareholder / activist investor, An Inconvenient Truth, Anthropocene, battle of ideas, Berlin Wall, Big Tech, big-box store, bilateral investment treaty, Blockadia, Boeing 747, British Empire, business climate, Capital in the Twenty-First Century by Thomas Piketty, carbon credits, carbon footprint, carbon tax, clean tech, clean water, Climategate, cognitive dissonance, coherent worldview, colonial rule, Community Supported Agriculture, complexity theory, crony capitalism, decarbonisation, degrowth, deindustrialization, dematerialisation, different worldview, Donald Trump, Downton Abbey, Dr. Strangelove, electricity market, energy security, energy transition, equal pay for equal work, extractivism, Exxon Valdez, failed state, fake news, Fall of the Berlin Wall, feminist movement, financial deregulation, food miles, Food sovereignty, gentrification, geopolitical risk, global supply chain, green transition, high-speed rail, hydraulic fracturing, ice-free Arctic, immigration reform, income per capita, Intergovernmental Panel on Climate Change (IPCC), Internet Archive, invention of the steam engine, invisible hand, Isaac Newton, James Watt: steam engine, Jones Act, Kickstarter, Kim Stanley Robinson, land bank, light touch regulation, man camp, managed futures, market fundamentalism, Medieval Warm Period, Michael Shellenberger, military-industrial complex, moral hazard, Naomi Klein, new economy, Nixon shock, Occupy movement, ocean acidification, off-the-grid, offshore financial centre, oil shale / tar sands, open borders, patent troll, Pearl River Delta, planetary scale, planned obsolescence, post-oil, precautionary principle, profit motive, quantitative easing, race to the bottom, Ralph Waldo Emerson, Rana Plaza, remunicipalization, renewable energy transition, Ronald Reagan, Russell Brand, scientific management, smart grid, special economic zone, Stephen Hawking, Stewart Brand, structural adjustment programs, Ted Kaczynski, Ted Nordhaus, TED Talk, the long tail, the scientific method, The Wealth of Nations by Adam Smith, trade route, transatlantic slave trade, trickle-down economics, Upton Sinclair, uranium enrichment, urban planning, urban sprawl, vertical integration, Virgin Galactic, wages for housework, walkable city, Washington Consensus, Wayback Machine, We are all Keynesians now, Whole Earth Catalog, WikiLeaks

During the Cold War, U.S. physicists imagined weakening the nation’s enemies by stealthily manipulating rainfall patterns, whether by causing droughts or by generating targeted storms that would turn a critical supply route into a flooded mess, as was attempted during the Vietnam War.10 So it’s little wonder that mainstream climate scientists have, until quite recently, shied away from even discussing geoengineering. In addition to the Dr. Strangelove baggage, there was a widespread fear of creating a climate moral hazard. Just as bankers take greater risks when they know governments will bail them out, the fear was that the mere suggestion of an emergency techno-fix—however dubious and distant—would feed the dangerous but prevalent belief that we can keep ramping up our emissions for another couple of decades.

., 282 fuel prices, 112 fuel quality standards, 71 Fukushima nuclear disaster, 136, 268 G20 summits, 115 gardening, 93 gas companies, see extractive industries Gasland, 217, 304 Gass, Heather, 38 Gates, Bill, 135, 235, 236–37, 252, 254, 263, 264, 268–69, 276–77, 280, 281, 289 Gates Foundation, 236 Gauger, Ralf, 100 Gearon, Jihan, 398–99 Gemmill, Faith, 375–76 General Electric, 226 General Motors, 67, 196, 210, 221, 282 Geneva, 6 gentrification, 156 Geoclique, 263, 264, 268–69 geoengineering, 57–58, 154, 236, 255, 256–90, 447 as bridging tool, 257, 281 complexity of biosphere ignored by, 267–68, 290, 422 dangers of, 266–67, 279–80 ethics of, 277 extractive industries and, 281–84 moral hazard and, 261 negative public view of, 290 Royal Society conference on, 256–61, 263–67, 280–81, 284–85, 451 as shock doctrine, 276–78 see also Pinatubo Option; Solar Radiation Management “Geoengineering: The Horrifying Idea Whose Time Has Come” (forum), 263 geologists, economic, 46 Geophysical Research Letters, 329 George, Russ, 268 Georgia Institute of Technology, 432 Georgia Strait, 374 geothermal energy, 127 Geraghty, Jim, 52 German National Center for Aerospace, Energy and Transport Research (DLR), 138 Germany, 75, 132, 133, 162, 218, 225 energy privatization reversal in, 96–98, 127–28 feed-in tariffs in, 131, 133 growth of dirty coal use in, 136–39, 144, 224 nuclear energy phased out in, 97, 136–38 renewable energy in, 97–98, 130–31, 136–39, 224, 237, 398, 451 travel habits and wealth in, 113 Gerze, Turkey, 349 Gillette, Wyo., 343, 344, 395, 396 Gilman, Nils, 189 Gindin, Sam, 122–23 Gingrich, Newt, 35 glacier melt, 14, 15, 175 global feed-in tariff, 413–14 Global Frackdown, 304 globalization, 22, 64 corporate, 19 dawning of, 18–19 of markets, 39, 85, 171, 412 successes of, 19 Global North, 49, 314 see also developed world; postindustrialized nations Global Risks report, World Economic Forum, 112 Global South, 53, 77, 181, 309, 314, 412 Blockadia movements in, 412 environmentalism in, 202 see also developing world global warming, see climate change Globe and Mail, 325, 333 God’s Last Offer (Ayres), 280 God Species, The (Lynas), 279 gold, mining of, 296 Goldenberg, Suzanne, 312 Golden, KC, 304, 320 Goldman Sachs, 51, 208n, 352 goods, lasting vs. disposable, 85, 90 Gore, Al, 41, 67, 85, 150, 155, 211, 212, 218, 230, 233, 241, 242, 244, 385 government intervention, 42, 43, 178, 201–3 necessity for, 54–55 government regulation: corruption in, 333–34 laxity of, 330–31, 333 governments, collusion between extractive industries and, 297–99, 303, 306–7, 308, 360, 361–66, 378–80 Grandin, Greg, 455 Grantham, Jeremy, 233 Grantham, Mayo, Van Otterloo & Co., 233 Grantham Foundation for the Protection of the Environment, 233n Great Barrier Reef, 147–48, 301 Great Depression, 89, 115, 454 Great Transition, 89, 115 Greece, 466 austerity programs in, 9, 108, 131–32, 154 economic problems of, 297 government repression of anti-mining movement in, 297–98, 303 oil and gas exploration in, 22, 181–82 Skouries forest mining project in, 293–94, 296–98, 303, 314, 342, 347, 445 WTO challenges brought against, 65 Green for All, 92 Green Alliance, U.K., 90 green consumerism, 211–13 “green deserts,” 180 green energy entrepreneurs, free market and, 69–70 Green Energy and Green Economy Act, 66–69 green energy programs, trade law challenges to, 64–65, 68–69 green fascism, 54 Greenhouse Development Rights framework, 417–18 greenhouse effect, 74, 213 greenhouse gas emissions, 6, 64–65, 90, 198, 219, 259 computer models of, 270 cost of, 112 countries’ responsibility for internal, 79 cumulative effect of, 21, 40, 56, 175, 409–10, 416 decreased work hours as offset to, 94 deregulation and, 210 distorted global picture of, 79, 411–12 fracking and, 129, 143–44, 214, 217, 304 free trade and, 80–83 global gas boom and, 143–44 globalized agriculture and, 77–78 increase in, 20, 452 low wages and high, 81–82 reduction of, see emission reduction from shipping, 76, 79 standards for, 25 WTO regulations and, 71 see also carbon emissions Greenland: extraction industry in, 385 melting ice sheet in, 12, 148, 385 green NGOs, geoengineering and, 264, 280 Green Party (New Brunswick), 374 Greenpeace, 84, 156, 197, 199, 201, 205, 233n, 264, 356 anti-drilling protests of, 300 EDF spying on, 362 Greenpeace U.K., 376 green technology, 85, 87, 89–90 for developing world, 76, 85 investment in, 89, 156, 400–407, 451 green towns, 406–7 Greenwich, University of, 101 Gross Domestic Product (GDP), 92 Grunwald, Michael, 124 Guarani, 221 Guardian, 149, 312, 346, 363–64, 383 Guay, Justin, 352 Gulf Restoration Network, 425 Gupta, Sanjay, 430 Guujaaw, 368–69, 383 Haida Gwaii, 369 Haida Nation, land claims of, 368–69 Haimen, China, 350 Hair, Jay, 84, 191 Haiti, 457 Haiyan, Typhoon, 107, 175, 406 Halkidiki, Greece, 294, 342, 445 Halliburton, 330 Halliburton Loophole, 328 Hällström, Niclas, 413–14 Halstead Property, 51 Hamburg, Germany, 96–97 Hamilton, Clive, 89, 175, 264 Hansen, James, 22, 41, 73, 140 Hansen, Wiebke, 97 Harper administration (Canada), 302–3, 362 environmental protections weakened by, 381–82 “war on science” of, 326–28 Harter, John, 313 Harvard Medical School, 105 Harvard University, 81, 354–55 Hauper, Debbi, 373 Have You Ever Seen a Moose?

., 317 Minnesota, 27 Minnesota, University of, Institute on the Environment at, 58 miscarriages, environmental toxins linked to, 424–25, 429, 439 Mississippi, 431 Mississippi River: drought of 2012 in, 2–3 flooding of 2011 in, 3 Mississippi River Delta, ecological damage in, 425–26 Mitchell, Stacy, 209 Mobil, 192 Mohave Generating Station, 398 Mohit, Nastaran, 103–5 Molina, Patricia, 182 Monbiot, George, 363–64 Monsanto, 9, 80, 135, 196 monsoons, 268, 269, 270, 273–74, 287 Montana, 53n, 318, 370, 381 coal mining in, 320, 342–43, 346, 370, 388–93, 395, 397, 445 Environmental Quality Department of, 397 State Land Board of, 389 Monterey Shale, 347 Montreal, Canada, 313 Montreal, Maine & Atlantic railroad, 333 Montreal Protocol on ozone depletion, 220 moose, disappearance of, 26–27 Morales, Evo, 180–81 moral hazard, geoengineering and, 261 moral imperative: in abolition movement, 462–63 in climate movement, 336, 386–87, 464 divestment movement and, 354–55 in social movements, 462, 463–64 Morano, Marc, 32, 34, 45 Morton, Oliver, 259 Mosaddegh, Mohammad, 454 Moses, Marlene, 64, 449 Mossville, La., 429–30 Mother Earth, see Earth Mother/Mother Earth concept Mount Elgon National Park, 222 Movement Generation, 448 Movement for the Survival of the Ogoni People (MOSOP), 306 Mueller, Tadzio, 138 Muir, John, 183–84, 211 Mukherji, Joydeep, 368–69 multinational corporations: cheapest labor force and, 81–82 export-led development and, 82, 412 Mumbai, 13 Munich, Germany, 97 Murdoch, Rupert, 35 Myhrvold, Nathan, 262, 264, 269, 277, 280, 281 Nagasaki, atomic bombing of, 277–78 Narain, Sunita, 96, 414 NASA, 14, 152 earth-from-space photographs by, 286 Goddard Institute for Space Studies at, 22, 73 NatCen Social Research, 117 Nation, 420 National Academy of Sciences, U.S., 152, 282 National Association of Manufacturers, 227 National Audubon Society, 84 National Center for Atmospheric Research, 272 National Energy Board, Canada, 362 National Environment Appellate Authority, India, 350 National Guard, 103 National Oceanic and Atmospheric Administration (NOAA), U.S., 102, 426, 432–33, 434, 436 national security, 49 National Toxics Campaign, 206 National Union of Rail, Maritime and Transport Workers, 253 National Wildlife Federation, 84, 185, 191, 226, 390, 393 Native American cosmologies, 184 natural gas, 67, 102, 219 Big Green’s advocacy of, 199–201, 235n, 236 as bridge fuel, 128–30, 211, 213–14, 252, 257, 287 climate benefits of, 144n conventional, 215 flaring of, 305–6 fracking and, see fracking renewables displaced by, 44n, 128–30, 214–16, 252 for vehicles, 237 Willett’s support for, 235–36 natural gas industry: Sierra Club and, 197 strategic miscalculations by, 316–17 Natural Resource Partners, 349 Natural Resources Defense Council, 84, 115, 198, 205, 213, 226, 325, 357 Move America Beyond Oil campaign, 231 Nature, 37, 259 nature: delayed response of, 175 fertility cycle of, 438–39, 446–48 legal rights of, 443–45 steam power and freedom from, 172–74 Nature Climate Change, 290 Nature Conservancy, 191–95, 196, 206, 208n, 210, 212n, 226, 233n, 355 Business Council of, 196 fracking supported by, 215 oil and gas drilling by, 192–95, 196, 206, 215, 451 Paraná offset and, 221, 222 Nauru, 64, 161–69, 175, 187, 221n, 311 Australian offshore refugee detention center on, 166–67 independence of, 162 phosphate of lime in, 162–63 Navajo, 398–99 Navarro Llanos, Angélica, 5–7, 40, 409 Navigable Waters Protection Act, gutting of, 381–82 Nebraska, 403 Nelson, Gaylord, 153 neoliberalism, 39, 43, 72–73, 80, 131, 132, 154, 158, 466 Netherlands, 99 anti-fracking movement in, 348 divestment movement in, 354 neuropathy, 436, 438 “New Abolitionism, The” (Hayes), 455 New America Foundation, 263 New Atlantis (Bacon), 266 New Brunswick: anti-fracking campaign in, 299, 303, 370, 373–74, 381 Indigenous rights conflict in, 371–74 oil train explosion in, 333 New Deal, 10, 453, 454 New Democratic Party (Canadian), 36 New England, 441 New Era Colorado, 98 New Era Windows Cooperative, 123n Newfoundland, anti-fracking movement in, 348 New Green Revolution, 135 New Jersey, Superstorm Sandy in, 53 New New Deal (Grunwald), 124 New Orleans, La., 4, 9, 53, 105, 407 New South Wales, anti-coal movement in, 300–301, 376 New York, N.Y., 13, 63, 103–6, 157 Bloomberg as mayor of, 235 disaster infrastructure in, 51 New Yorkers Against Fracking, 214 New York State: anti-fracking ordinances in, 361, 365 fracking in, 316–17 fracking moratorium in, 348 renewable power plan for, 102 Superstorm Sandy in, 53, 405 New York Times, 333, 411 New York Times Magazine, 286 New Zealand, 163, 182, 290 Nexen, 246 Nez Perce, 319, 370 Nicaragua, 348n Niger, 270 Niger Delta, 197, 219 government repression of anti-oil movements in, 306–7, 308, 370 oil extraction in, 305–9, 358 Nigeria, 219, 305 carbon emissions of, 305 colonial heritage of, 370 political unrest in, 308–9, 358 Nile River, volcanic eruptions and, 273 Nilsson, David, 220–21 9/11, 6, 63 Nixon, Richard, 125 Nixon, Rob, 276 Nompraseurt, Torm, 321 nonbinding agreements, at Copenhagen, 12, 13–14, 150 nongovernmental organizations (NGOs), 362 geoengineering and, 264, 280 Norgaard, Kari, 462 Norse Energy Corporation USA, 365 North Africa, 274 North America, 182 emissions from, 40 program cuts in, 110 wealth in, 114 World War II rationing in, 115–16 North American Free Trade Agreement (NAFTA), 19, 71, 76, 78, 83–85, 358–59 North Dakota, Bakken formation in, 71 Northern Cheyenne, 322–23, 346, 370, 386, 389–93, 399 traditional values of, 391–92 unemployment among, 391 Northern Cheyenne Reservation, 322, 389, 390, 397, 408 fire on, 396 solar heaters for, 393–96 Northern Gateway pipeline, 312, 362, 381 campaign against, 302, 337–42, 344–45, 365–66, 367, 380 cost of, 400 Joint Review Panel for, 337–42, 363, 365 North Texas, University of, 312 North Vancouver, Canada, 323 Norway, 99, 130, 179, 198 Nova Scotia, 371 npower, 149 nuclear holocaust, 15 nuclear power, 57, 58, 97, 118, 131, 199, 202, 205 Germany’s phasing out of, 97, 136–38 “next generation” technologies for, 137n, 236 in the wake of Fukushima, 136 Obama, Barack, 12, 227, 392, 412 “all of the above” energy policy of, 22, 302, 304–5 environmental agenda of, 45, 118, 120–21, 141–42 and fossil fuel industry, 141 health care law of, 105, 125, 151, 227 and Keystone XL, 140–41, 403 responses to financial crisis by, 120–26 support for biofuels by, 32 Occupy Sandy, 103–5, 406 Occupy Wall Street, 103, 153, 206, 464 Oceana, 330–31 oceans, 175 acidification of, 165, 259, 434 dead zones in, 439 iron “fertilization” in, 257, 258, 268, 279 see also marine life O’Connor, John, 327 Office of Price Administration, 115 offshore drilling, 22, 80, 144 deepwater, 2, 142, 300, 310, 324 lifting of limits on, 145 see also Arctic drilling; BP, Deepwater Horizon disaster of Ogallala Aquifer, 346 Ogoni, Ogoniland, 306, 309, 370 oil, 102, 128, 215 Oil Change International, 115 oil industry, 197 political and economic power of, 316 public ownership of, 130 and drop in conventional production, 147 see also extractive industries Oil Sands Leadership Initiative (OSLI), 246 Ojo, Godwin Uyi, 306, 309 Okanagan, land claims of, 368 O’Neill, Gerard, 288 One Million Climate Jobs, 127 Ontario, 56, 382 feed-in tariffs in, 67, 133 local content provision challenged in, 68–70, 71, 99, 126 renewable energy sector in, 66–69 Oomittuk, Steve, 375 Operation Climate Change, 307–8 opposition movements, 9–10 see also Blockadia; climate movement Oregon, 319, 320, 349 Oreskes, Naomi, 42 Organisation for Economic Co-operation and Development (OECD), 114–15 Orwell, George, 96 Osuoka, Isaac, 307–8 Otter Creek, Mont., 322–23, 389, 397 Our Hamburg—Our Grid coalition, 96–97 oysters, 431–32, 434 ozone depletion, 16 Pacala, Stephen, 113 Pacific Northwest: ecological values of, 319–20 proposed coal export terminals in, 320, 322, 346, 349, 370, 374 Pacific Ocean, acidification of, 434 Paine, Tom, 314 Palin, Sarah, 1 palm oil plantations, 222 Papanikolaou, Marilyn, 361 Papua New Guinea, 200, 220 Paradise Built in Hell (Solnit), 62–63 Paraná, Brazil, 221, 222 Parenti, Christian, 49, 186 Parfitt, Ben, 129 Paris, public transit in, 109 Parkin, Scott, 296 Parr, Michael, 227 particulate pollution, 176 Passamaquoddy First Nation, 371–72 Patel, Raj, 136 Patles, Suzanne, 381 Paulson, Henry, 49 Peabody Energy, 391 Pearl River Delta, 82 Pelosi, Nancy, 35 Pendleton, Oreg., 319 Peninsula Hospital Center, 104 Penn State Earth System Science Center, 55 Pennsylvania: fracking in, 357n Homeland Security Office of, 362 water pollution in, 328–29 Pensacola, Fla., 431 permafrost, 176 Peru, 78, 220–21 pest outbreaks, 14 Petrobras, 130 PetroChina, 130 Pew Center on Global Climate Change, 226 Pew Research Center for People & the Press, 35 Philippines, 107, 109 Phillips, Wendell, 463 phosphate of lime, 163–64, 166 photovoltaic manufacturing, 66 Pickens, T.


pages: 519 words: 148,131

An Empire of Wealth: Rise of American Economy Power 1607-2000 by John Steele Gordon

accounting loophole / creative accounting, Alan Greenspan, bank run, banking crisis, Bretton Woods, British Empire, business cycle, buttonwood tree, California gold rush, Charles Babbage, clean water, collective bargaining, Corn Laws, Cornelius Vanderbilt, corporate governance, cotton gin, cuban missile crisis, disintermediation, double entry bookkeeping, failed state, Fairchild Semiconductor, financial independence, flying shuttle, Ford Model T, Frederick Winslow Taylor, full employment, Glass-Steagall Act, global village, Ida Tarbell, imperial preference, industrial research laboratory, informal economy, interchangeable parts, invisible hand, Isaac Newton, it's over 9,000, Jacquard loom, James Hargreaves, James Watt: steam engine, joint-stock company, joint-stock limited liability company, junk bonds, lone genius, Louis Pasteur, low interest rates, margin call, Marshall McLuhan, means of production, megaproject, Menlo Park, Mikhail Gorbachev, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, New Urbanism, postindustrial economy, price mechanism, Ralph Waldo Emerson, RAND corporation, rent control, rent-seeking, reserve currency, rolodex, Ronald Reagan, Savings and loan crisis, spinning jenny, Suez canal 1869, The Wealth of Nations by Adam Smith, three-masted sailing ship, trade route, transaction costs, transcontinental railway, undersea cable, vertical integration, Yom Kippur War

The Glass-Steagall Act also established the Federal Bank Deposit Insurance Corporation (FDIC), which guaranteed the deposits of banks that joined the system (only banks that were members of the Federal Reserve were required to join) up to $5,000 per account. At a stroke, the bank run, a recurring nightmare in the American economy since the first one in 1809, became a thing of the past. Roosevelt had worried about the “moral hazard” created by a system that relieved bankers of the worry that their depositors’ assets would be wiped out. But he decided that eliminating bank runs was worth it. There has not been a significant American bank run since, but events long after his death would prove that Roosevelt had been right to worry.

The ghost of Thomas Jefferson’s hatred of getting and spending, it seemed, had at last been laid to rest. Unfortunately, that ghost was to have one more turn upon the stage of the American economy. FRANKLIN ROOSEVELT had been reluctant to accept the idea of deposit insurance, for he feared the “moral hazard” it ineluctably created. “We do not wish to make the United States government liable for the mistakes and errors of individual banks,” he said, “and put a premium on unsound banking in the future.” But politics is usually a choice between imperfect means to desirable ends, and the Federal Deposit Insurance Corporation functioned well in the banking cartel that developed under the New Deal.


pages: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

"World Economic Forum" Davos, accounting loophole / creative accounting, Alan Greenspan, Albert Einstein, Anthropocene, anti-globalists, asset-backed security, banking crisis, banks create money, basic income, biodiversity loss, bond market vigilante , Boris Johnson, Bretton Woods, British Empire, Bullingdon Club, business cycle, call centre, capital controls, carbon footprint, carbon tax, collective bargaining, corporate raider, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, declining real wages, deglobalization, degrowth, deindustrialization, delayed gratification, demand response, don't be evil, Double Irish / Dutch Sandwich, en.wikipedia.org, Etonian, financial engineering, financial innovation, financial intermediation, Fractional reserve banking, full employment, G4S, Goldman Sachs: Vampire Squid, green new deal, high net worth, high-speed rail, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", James Dyson, job automation, Julian Assange, junk bonds, Kickstarter, labour market flexibility, laissez-faire capitalism, land bank, land value tax, long term incentive plan, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, mass immigration, means of production, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, Philip Mirowski, plutocrats, popular capitalism, predatory finance, price stability, proprietary trading, pushing on a string, quantitative easing, race to the bottom, rent-seeking, retail therapy, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, Steve Jobs, tacit knowledge, TED Talk, The Nature of the Firm, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transfer pricing, trickle-down economics, universal basic income, unpaid internship, upwardly mobile, Washington Consensus, wealth creators, WikiLeaks, Winter of Discontent, working poor, Yom Kippur War, zero-sum game

Now it has become clear that major banks are too big to fail, they have still less incentive to act prudently, as they are seen as a safe risk by other companies – indeed they can raise credit more easily than banks that are small enough to fail! When the rewards of acting in an anti-social way are greater than the penalties for doing so, this is called ‘moral hazard’. According to Mervyn King, the ‘massive support extended to the banking sector around the world … has created possibly the biggest moral hazard in history’.136 Champions of free enterprise, who had campaigned against state regulation and poured scorn on the public sector and welfare state, were happy to pocket state subsidies on a hitherto unseen scale. Contrite they were not.


pages: 518 words: 147,036

The Fissured Workplace by David Weil

"Friedman doctrine" OR "shareholder theory", accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, banking crisis, barriers to entry, behavioural economics, business cycle, business process, buy and hold, call centre, Carmen Reinhart, Cass Sunstein, Clayton Christensen, clean water, collective bargaining, commoditize, company town, corporate governance, corporate raider, Corrections Corporation of America, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, declining real wages, employer provided health coverage, Frank Levy and Richard Murnane: The New Division of Labor, George Akerlof, global supply chain, global value chain, hiring and firing, income inequality, independent contractor, information asymmetry, intermodal, inventory management, Jane Jacobs, Kenneth Rogoff, law of one price, long term incentive plan, loss aversion, low skilled workers, minimum wage unemployment, moral hazard, Network effects, new economy, occupational segregation, Paul Samuelson, performance metric, pre–internet, price discrimination, principal–agent problem, Rana Plaza, Richard Florida, Richard Thaler, Ronald Coase, seminal paper, shareholder value, Silicon Valley, statistical model, Steve Jobs, supply-chain management, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, Triangle Shirtwaist Factory, ultimatum game, union organizing, vertical integration, women in the workforce, yield management

Because many people sell cars because of problems they have with them, buyers in the market assume the worst (in part because they cannot easily see the quality of any given car). Because of this expectation, the price for used cars is pushed down, so that even the seller of a good car will be forced to receive a lower price than the true value of the vehicle warrants. 57. A well-known problem arising from this is moral hazard, where a principal ends up creating precisely the wrong incentives for agents. For example, when selling fire insurance to customers, the insurer hopes that they will be careful in regard to fire safety. But since the customers now know that damages will be covered, they become more, rather than less, careless. 58.

., 195, 345n33 Milliken, Michael, 53 Mine Improvement and New Emergency Response Act (MINER Act), 317n24, 357n55, 359n62 Mine Safety and Health Act, 102–103, 238 Mine Safety and Health Administration (MSHA), 101–103, 357n55; and enforcement outlays, 215–216; and POV program, 238–240, 358n59, 358n60 Minimum wage standards, 326n19, 349n65; violations, 9, 18, 130, 132; and fast food industry, 130; and janitorial services industry, 140; and hospitality industry, 154; and apparel industry, 226 Misclassification of workers, 10, 212, 236. See also Independent contracting M corporation, origins of, 31–34 Monopsony, 296n25, 309nn4–5, 309n7, 313n33; power, 79–81; model, 87 Moore’s Law, 61 Moral hazard, 306n57 Morgan Foods, 129 Mt. Olive Pickles, 260 Munro Muffler Company, 229–230 Mutual funds, 45–46 Nail salons, 256 National Employment Law Project, 284, 293n20 National Franchise Program (Australia), 224 National Labor Relations Act (NLRA), 41, 77, 184–185, 207, 246, 316n11; definition of employee, 21; and posting of notices, 253 National Labor Relations Board, 185, 292n14; NLRB v.


pages: 475 words: 155,554

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

"World Economic Forum" Davos, Alan Greenspan, 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, bond market vigilante , book value, Boris Johnson, British Empire, capital controls, carbon credits, carbon footprint, carbon tax, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, Crossrail, currency risk, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, Eyjafjallajökull, financial deregulation, financial engineering, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, high-speed rail, hiring and firing, inflation targeting, Irish property bubble, junk bonds, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, low interest rates, margin call, market clearing, megacity, megaproject, Mikhail Gorbachev, mini-job, mittelstand, Money creation, 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, tail risk, 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, WikiLeaks, working-age population, zero-sum game

Varley was holed up at his Canary Wharf office, refusing repeated requests from Vadera and Myners to come to the Treasury. Instead, Varley and his team waited for notification of the amount of capital required, and handled all meetings by conference call. Varley’s team sensed ‘menace’ from the Bank of England and its desire to avoid ‘moral hazard’. In his office a board member challenged Varley to convince him that refusing government capital was not simply about keeping his job. He conceded that a failure to raise private capital would see him in a difficult position. By March he had agreed to raise £7 billion, a figure he told friends was ‘seared onto his heart’.

The Irish economy made up less than 2 per cent of the Eurozone, but Ireland received 25 per cent of all loans made by central banks within the Eurozone. Emergency funds were designed to be advanced to solvent banks facing a liquidity problem under the centuries-old doctrine of ‘lender of last resort’. The precise parameters of solvency were, however, unclear under the policy of ‘constructive ambiguity’ designed to prevent moral hazard by banks. In other words, the central bankers would not identify in advance how they would rescue troubled banks, because, rightly, they feared bankers would abuse the privilege and indulge in risky funding, knowing they would be supported by their central bank. Unfortunately, the ambiguity was more destructive than constructive.


pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

Abraham Maslow, Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, bread and circuses, Bretton Woods, business cycle, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, Cornelius Vanderbilt, corporate governance, creative destruction, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, disinformation, diversification, double helix, Edward Glaeser, financial deregulation, financial engineering, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, general purpose technology, George Akerlof, Gini coefficient, Glass-Steagall Act, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, Japanese asset price bubble, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, language acquisition, Large Hadron Collider, liberal capitalism, light touch regulation, Long Term Capital Management, long term incentive plan, Louis Pasteur, low cost airline, low interest rates, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, mass immigration, means of production, meritocracy, Mikhail Gorbachev, millennium bug, Money creation, money market fund, moral hazard, moral panic, mortgage debt, Myron Scholes, Neil Kinnock, new economy, Northern Rock, offshore financial centre, open economy, plutocrats, power law, price discrimination, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, Right to Buy, rising living standards, Robert Shiller, Ronald Reagan, Rory Sutherland, Satyajit Das, Savings and loan crisis, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, systems thinking, tail risk, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, three-masted sailing ship, too big to fail, unpaid internship, value at risk, Vilfredo Pareto, Washington Consensus, wealth creators, work culture , working poor, world market for maybe five computers, zero-sum game, éminence grise

The latter could raise revenues equal to 1 per cent of GDP. The IMF is trying to do the right thing, but agreement among the G20 has been painfully slow. Britain should proceed ahead of any international agreement because the UK needs additional tax revenue; because it needs to send a signal about its insistence that bankers pay for the moral hazard they create; because it is concerned about the size of the financial sector in relation to the UK economy as a whole; and because it wants to stimulate others into following suit. Here again the coalition government has dared to do what the outgoing Labour government did not, although its proposed levy is very small.

Coval, Jakub Jurek and Erik Stafford (2008) ‘The Economics of Structured Finance’, Harvard Business School Working Paper No. 09-060. 18 Andrew Haldane (2010) ‘The $100 Billion Question’, presentation to the Institute of Regulation & Risk, Hong Kong. 19 Steven Dunaway (2009) ‘Global Imbalances and the Financial Crisis’, Special Report No. 44, Council of Foreign Relations, Center for Geoeconomic Studies. 20 Michael Keeley (1990), ‘Deposit Insurance, Risk and Market Power in Banking’, American Economic Review 80: 1183–1200. See also Thomas Hellman, Kevin Murdock and Joseph Stiglitz (2000) ‘Liberalization, Moral Hazard in Banking and Prudential Regulation: Are Capital Requirements Enough?’, American Economic Review 90 (1): 147–65; and Gabriel Jimenez, Jose Lopez and Jesus Saurina (2007) ‘How Does Competition Impact Bank Risk-Taking?’, Federal Reserve Bank of San Francisco Working Paper No. 2007–23. 21 Walter Bagehot (1873; 1908) Lombard Street: A Description of the Money Market, at http://socserv.mcmaster.ca/econ/ugcm/3ll3/bagehot/lombard.html. 22 Hyun Song Shin (2009) ‘Reflections on Northern Rock: The Bank Run that Heralded the Global Financial Crisis’, Journal of Economic Perspectives 23 (1): 101–19. 23 William Cohan (2009) House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, Allen Lane, p. 32. 24 Dani Rodrik (2007) ‘The False Promise of Financial Liberalization’, Project Syndicate, at http://www.project-syndicate.org/commentary/rodrik14. 25 See the response of the National Association of Insurance Commissioners: NAIC Response to Treas-DO-2007-0018, 28 November 2007, at http://www.naic.org/documents/topics_federal_regulator_treasury_response_0711.pdf. 26 Daniel K.


pages: 566 words: 160,453

Not Working: Where Have All the Good Jobs Gone? by David G. Blanchflower

90 percent rule, active measures, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, bank run, banking crisis, basic income, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Lives Matter, Black Swan, Boris Johnson, Brexit referendum, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clapham omnibus, collective bargaining, correlation does not imply causation, credit crunch, declining real wages, deindustrialization, Donald Trump, driverless car, estate planning, fake news, Fall of the Berlin Wall, full employment, George Akerlof, gig economy, Gini coefficient, Growth in a Time of Debt, high-speed rail, illegal immigration, income inequality, independent contractor, indoor plumbing, inflation targeting, Jeremy Corbyn, job satisfaction, John Bercow, Kenneth Rogoff, labor-force participation, liquidationism / Banker’s doctrine / the Treasury view, longitudinal study, low interest rates, low skilled workers, manufacturing employment, Mark Zuckerberg, market clearing, Martin Wolf, mass incarceration, meta-analysis, moral hazard, Nate Silver, negative equity, new economy, Northern Rock, obamacare, oil shock, open borders, opioid epidemic / opioid crisis, Own Your Own Home, p-value, Panamax, pension reform, Phillips curve, plutocrats, post-materialism, price stability, prisoner's dilemma, quantitative easing, rent control, Richard Thaler, Robert Shiller, Ronald Coase, selection bias, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, trade liberalization, universal basic income, University of East Anglia, urban planning, working poor, working-age population, yield curve

As the MPC was pushing interest rates up, from 4.5 percent in July 2006 to 5.75 percent in August 2007, Northern Rock had agreed to issue a tranche of mortgages at interest rates lower than those it eventually had to pay to finance them. Northern Rock was in trouble. The Bank of England emphasized the concerns over moral hazard. They wanted to send a message that if bankers took excessive risks they could not look to the central bank to rescue them from the consequences. On September 13, 2007, Alistair Darling, the Chancellor of the Exchequer, had little choice but to agree that the central bank should provide emergency funding to Northern Rock.

By mid-September 2008 they “were worth just 20p, as the full scale of the UK housing market crash, and the global financial turmoil, made the headwear of choice for B&B shareholders a tin hat rather than a bowler.” 15 DeAnne Julius, a former member of the MPC, was reported in the Economist on October 18, 2007, as saying, in relation to Northern Rock, that “the first duty of a central bank is to retain confidence in the banking system, especially at a time of illiquidity, and our central bank didn’t do that.”16 Sleeping in the Back Shop Lord John McFall, chairman of the TSC, famously accused Sir John Gieve, the deputy governor at the Bank of England in charge of financial stability, at a hearing about Northern Rock on September 20, 2007 (Q6), of having a sleep in the back shop while a mugging was taking place in the front. The TSC was also particularly scathing about the governor of the Bank of England’s inaction, due to fears of moral hazard. This was economic theory speaking; it would surely have never been said by an experienced banker. It was time to act, not dither. Michael Fallon, at the time an MP and subsequently UK defense secretary, had it right when he suggested at the hearing that the problem was that the Bank of England failed the practical.


pages: 511 words: 151,359

The Asian Financial Crisis 1995–98: Birth of the Age of Debt by Russell Napier

Alan Greenspan, Asian financial crisis, asset allocation, bank run, banking crisis, banks create money, Berlin Wall, book value, Bretton Woods, business cycle, Buy land – they’re not making it any more, capital controls, central bank independence, colonial rule, corporate governance, COVID-19, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, Deng Xiaoping, desegregation, discounted cash flows, diversification, Donald Trump, equity risk premium, financial engineering, financial innovation, floating exchange rates, Fractional reserve banking, full employment, Glass-Steagall Act, hindsight bias, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, if you build it, they will come, impact investing, inflation targeting, interest rate swap, invisible hand, Japanese asset price bubble, Jeff Bezos, junk bonds, Kickstarter, laissez-faire capitalism, lateral thinking, Long Term Capital Management, low interest rates, market bubble, mass immigration, means of production, megaproject, Mexican peso crisis / tequila crisis, Michael Milken, Money creation, moral hazard, Myron Scholes, negative equity, offshore financial centre, open borders, open economy, Pearl River Delta, price mechanism, profit motive, quantitative easing, Ralph Waldo Emerson, regulatory arbitrage, rent-seeking, reserve currency, risk free rate, risk-adjusted returns, Ronald Reagan, Savings and loan crisis, savings glut, Scramble for Africa, short selling, social distancing, South China Sea, The Wealth of Nations by Adam Smith, too big to fail, yield curve

The bank will attempt to sterilise the intervention by increasing the outstanding issues of SBIs (treasury bills). History suggests full sterilisation is unlikely. Rising rupiah liquidity will significantly improve the outlook for the equity market. Arriving in Asia in the summer of 1995, it was easy to see that moral hazard was a key force driving capital flows into the region. Recent events in Mexico had created what was understood at the time to be a change in risk dynamics. In December 1994, the Mexican government had devalued their exchange rate, threatening huge losses to the foreign institutional investors that had bought tesobonos – US dollar-denominated debt instruments issued by the government of Mexico.

Those who bought equities as the exchange rate stabilised in January got sucked into what became a dead-cat bounce. A key problem was that none of the IMF plans had yet brought any new capital into the banking systems. This was difficult ground for the IMF to be involved in directly as committing any public capital to bail out a private institution creates moral hazard on a grand scale. In some countries in Asia the individuals who controlled these banks were often seen as the crony capitalists that the IMF thought Asia would be better without. So one reason interest rates tended to stay high was that people remained cautious about having money on deposit and any rush to banknotes tightened banks’ funding requirements and forced them to pay up for funds in the interbank markets.


pages: 1,034 words: 241,773

Enlightenment Now: The Case for Reason, Science, Humanism, and Progress by Steven Pinker

3D printing, Abraham Maslow, access to a mobile phone, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Albert Einstein, Alfred Russel Wallace, Alignment Problem, An Inconvenient Truth, anti-communist, Anton Chekhov, Arthur Eddington, artificial general intelligence, availability heuristic, Ayatollah Khomeini, basic income, Berlin Wall, Bernie Sanders, biodiversity loss, Black Swan, Bonfire of the Vanities, Brexit referendum, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, carbon tax, Charlie Hebdo massacre, classic study, clean water, clockwork universe, cognitive bias, cognitive dissonance, Columbine, conceptual framework, confounding variable, correlation does not imply causation, creative destruction, CRISPR, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, dark matter, data science, decarbonisation, degrowth, deindustrialization, dematerialisation, demographic transition, Deng Xiaoping, distributed generation, diversified portfolio, Donald Trump, Doomsday Clock, double helix, Eddington experiment, Edward Jenner, effective altruism, Elon Musk, en.wikipedia.org, end world poverty, endogenous growth, energy transition, European colonialism, experimental subject, Exxon Valdez, facts on the ground, fake news, Fall of the Berlin Wall, first-past-the-post, Flynn Effect, food miles, Francis Fukuyama: the end of history, frictionless, frictionless market, Garrett Hardin, germ theory of disease, Gini coefficient, Great Leap Forward, Hacker Conference 1984, Hans Rosling, hedonic treadmill, helicopter parent, Herbert Marcuse, Herman Kahn, Hobbesian trap, humanitarian revolution, Ignaz Semmelweis: hand washing, income inequality, income per capita, Indoor air pollution, Intergovernmental Panel on Climate Change (IPCC), invention of writing, Jaron Lanier, Joan Didion, job automation, Johannes Kepler, John Snow's cholera map, Kevin Kelly, Khan Academy, knowledge economy, l'esprit de l'escalier, Laplace demon, launch on warning, life extension, long peace, longitudinal study, Louis Pasteur, Mahbub ul Haq, Martin Wolf, mass incarceration, meta-analysis, Michael Shellenberger, microaggression, Mikhail Gorbachev, minimum wage unemployment, moral hazard, mutually assured destruction, Naomi Klein, Nate Silver, Nathan Meyer Rothschild: antibiotics, negative emissions, Nelson Mandela, New Journalism, Norman Mailer, nuclear taboo, nuclear winter, obamacare, ocean acidification, Oklahoma City bombing, open economy, opioid epidemic / opioid crisis, paperclip maximiser, Paris climate accords, Paul Graham, peak oil, Peter Singer: altruism, Peter Thiel, post-truth, power law, precautionary principle, precision agriculture, prediction markets, public intellectual, purchasing power parity, radical life extension, Ralph Nader, randomized controlled trial, Ray Kurzweil, rent control, Republic of Letters, Richard Feynman, road to serfdom, Robert Gordon, Rodney Brooks, rolodex, Ronald Reagan, Rory Sutherland, Saturday Night Live, science of happiness, Scientific racism, Second Machine Age, secular stagnation, self-driving car, sharing economy, Silicon Valley, Silicon Valley ideology, Simon Kuznets, Skype, smart grid, Social Justice Warrior, sovereign wealth fund, sparse data, stem cell, Stephen Hawking, Steve Bannon, Steven Pinker, Stewart Brand, Stuxnet, supervolcano, synthetic biology, tech billionaire, technological determinism, technological singularity, Ted Kaczynski, Ted Nordhaus, TED Talk, The Rise and Fall of American Growth, the scientific method, The Signal and the Noise by Nate Silver, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, total factor productivity, Tragedy of the Commons, union organizing, universal basic income, University of East Anglia, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, urban renewal, W. E. B. Du Bois, War on Poverty, We wanted flying cars, instead we got 140 characters, women in the workforce, working poor, World Values Survey, Y2K

The economist Leandro Prados de la Escosura found a strong correlation between the percentage of GDP that an OECD country allocated to social transfers as it developed between 1880 and 2000 and its score on a composite measure of prosperity, health, and education.38 And tellingly, the number of libertarian paradises in the world—developed countries without substantial social spending—is zero.39 The correlation between social spending and social well-being holds only up to a point: the curve levels off starting at around 25 percent and may even drop off at higher proportions. Social spending, like everything, has downsides. As with all insurance, it can create a “moral hazard” in which the insured slack off or take foolish risks, counting on the insurer to bail them out if they fail. And since the premiums have to cover the payouts, if the actuaries get the numbers wrong or the numbers change so that more money is taken out than put in, the system can collapse. In reality social spending is never exactly like insurance but is a combination of insurance, investment, and charity.

Since the effects of any measure applied to the entire planet are uneven from place to place, climate engineering raises the question of whose hand should be on the world’s thermostat: as with a bickering couple, if one country lowered the temperature at the expense of another, it could set off a war. Once the world depended on climate engineering, then if for any reason it slacked off, temperatures in the carbon-soaked atmosphere would soar far more quickly than people could adapt. The mere mention of an escape hatch for the climate crisis creates a moral hazard, tempting countries to shirk their duty to reduce greenhouse gas emissions. And the accumulated CO2 in the atmosphere would continue to dissolve in seawater, slowly turning the oceans into carbonic acid. For all these reasons, no responsible person could maintain that we can just keep pumping carbon into the air and slather sunscreen onto the stratosphere to compensate.

Research into how we might minimize the harm to millions of people before the solutions are completely in place only seems prudent, and Morton lays out scenarios of how a program of moderate and temporary climate engineering might be implemented even in a world that falls short of ideal global governance. The legal scholar Dan Kahan has shown that far from creating a moral hazard, providing information about climate engineering makes people more concerned about climate change and less biased by their political ideology.107 * * * Despite a half-century of panic, humanity is not on an irrevocable path to ecological suicide. The fear of resource shortages is misconceived.


Trend Commandments: Trading for Exceptional Returns by Michael W. Covel

Alan Greenspan, Albert Einstein, Alvin Toffler, behavioural economics, Bernie Madoff, Black Swan, business cycle, buy and hold, commodity trading advisor, correlation coefficient, delayed gratification, disinformation, diversified portfolio, en.wikipedia.org, Eugene Fama: efficient market hypothesis, family office, full employment, global macro, Jim Simons, Lao Tzu, Long Term Capital Management, managed futures, market bubble, market microstructure, Market Wizards by Jack D. Schwager, Mikhail Gorbachev, moral hazard, Myron Scholes, Nick Leeson, oil shock, Ponzi scheme, prediction markets, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Sharpe ratio, systematic trading, the scientific method, three-martini lunch, transaction costs, tulip mania, upwardly mobile, Y2K, zero-sum game

Sally Hogshead, Fascinate: Your 7 Triggers to Persuasion and Captivation. New York: Harper Collins, 2010, p. 117. 3. “Mind Over Money: Can Markets Be Rational When Humans Are Not?” NOVA, April 26, 2010. 4. Ibid. 5. Ibid. 6. Ibid. 7. Ibid. 8. Ibid. 248 9. Tre n d C o m m a n d m e n t s James Montier, “Mind Matters: Forever Blowing Bubbles: Moral Hazard and Melt-up.” Societe Generale, June 2, 2009. 10. “The Monsters Are Due on Maple Street.” The Twilight Zone, March 4, 1960. 11. Barry Ritholtz, “Why politics and investing don’t mix.” Washington Post, February 6, 2011. Speculari 1. Wall Street: Money Never Sleeps, dir. Oliver Stone, perf. Michael Douglas, DVD, 20th Century Fox, 2010. 2.


pages: 225 words: 61,388

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa by Dambisa Moyo

affirmative action, Asian financial crisis, belling the cat, Bob Geldof, Bretton Woods, business cycle, buy and hold, colonial rule, correlation does not imply causation, credit crunch, diversification, diversified portfolio, en.wikipedia.org, European colonialism, failed state, financial engineering, financial innovation, financial intermediation, Hernando de Soto, income inequality, information asymmetry, invisible hand, Live Aid, low interest rates, M-Pesa, market fundamentalism, Mexican peso crisis / tequila crisis, microcredit, moral hazard, Multics, Ponzi scheme, rent-seeking, risk free rate, Ronald Reagan, seminal paper, sovereign wealth fund, The Chicago School, trade liberalization, transaction costs, trickle-down economics, Washington Consensus, Yom Kippur War

When forming their groups, borrowers have an incentive at the onset to match themselves with other good borrowers, and exclude those known to be high-risk. Naturally, this self-selection mechanism helps the lender screen the borrowers and reduce the risk of default. Joint liability also addresses the moral hazard lenders typically face – that is, the risk that once a loan is made, once the borrower has secured the cash, she defaults. Under joint liability, other members of the group have a vested interest to ensure their partners do not cheat, to see the loan repaid, so that they too can access funds. Having seen the explosion and success in micro-finance (micro-finance default rates in Zambia are less than 5 per cent), traditional banks have woken up to the opportunity that hitherto they have left untapped.


Global Financial Crisis by Noah Berlatsky

"World Economic Forum" Davos, accounting loophole / creative accounting, Alan Greenspan, asset-backed security, banking crisis, Bear Stearns, 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, Glass-Steagall Act, God and Mammon, Gordon Gekko, housing crisis, illegal immigration, income inequality, low interest rates, market bubble, market fundamentalism, mass immigration, Money creation, moral hazard, new economy, Northern Rock, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, social contagion, South China Sea, structural adjustment programs, subprime mortgage crisis, too big to fail, trade liberalization, transfer pricing, working poor

See Persian Gulf region Migrant workers Chinese, 110, 116, 130 Eastern Europeans, 98 Filipinos, 152, 154 International Organization for Migration, 132–134 remittances, 152, 160, 161, 198 United Kingdom (other Europeans), 113–114 xenophobia and job losses, 129–134 Military spending China, 145 Israel, 121, 124, 126 U.S. subsidies, 203, 204 Millennium Development Goals, UN, 136, 191 Mises, Ludwig von, 59, 61–62, 63 Monbiot, George, 201–206 Moral hazard, 34 Moral virtues, 30–31 Mortgage-based securities, 17, 174, 175, 176 Mortgage crisis, U.S., 16–17, 33– 34, 54–55 causes: boom thinking, 32–41 causes: greed, 27–31 causes: regulation blockage, 205–206 cost estimates, 220 See also Subprime mortgages Mortgage originators, 33 Index Mortgage rates raising, 90 subprime spikes, 34 N NAFTA, 180, 182, 183–184 Nashville, Tennessee, 77–78 National debts Australia, 89, 90 Europe, 94, 95, 100 United Kingdom, 60 United States, 60–61 Nationalization.


pages: 261 words: 10,785

The Lights in the Tunnel by Martin Ford

Alan Greenspan, Albert Einstein, Bear Stearns, Bill Joy: nanobots, Black-Scholes formula, business cycle, call centre, carbon tax, cloud computing, collateralized debt obligation, commoditize, Computing Machinery and Intelligence, creative destruction, credit crunch, double helix, en.wikipedia.org, factory automation, full employment, income inequality, index card, industrial robot, inventory management, invisible hand, Isaac Newton, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, knowledge worker, low skilled workers, mass immigration, Mitch Kapor, moral hazard, pattern recognition, prediction markets, Productivity paradox, Ray Kurzweil, Robert Solow, Search for Extraterrestrial Intelligence, Silicon Valley, Stephen Hawking, strong AI, technological singularity, the long tail, Thomas L Friedman, Turing test, Vernor Vinge, War on Poverty, warehouse automation, warehouse robotics

The primary problem we face is that the current economy is still highly reliant on human labor. We need to develop a system that avoids creating a disincentive to perform necessary work. In other words, we don’t want to create inequities by requiring some people to work and not others, and we don’t want a “moral hazard” that pushes people to avoid work and seek government support instead. The answer must be some type of job sharing solution. The exact mechanics of this solution would need to vary depending of the nature of the job. For many job types, it might be possible to simply move toward a part time work schedule so that more people are employed doing the same amount of work.


pages: 241 words: 63,981

Dirty Secrets How Tax Havens Destroy the Economy by Richard Murphy

"Friedman doctrine" OR "shareholder theory", banking crisis, barriers to entry, Bernie Sanders, centre right, corporate governance, Donald Trump, Double Irish / Dutch Sandwich, en.wikipedia.org, Glass-Steagall Act, Global Witness, high net worth, income inequality, intangible asset, Leo Hollis, light touch regulation, moral hazard, Occupy movement, offshore financial centre, race to the bottom, Social Responsibility of Business Is to Increase Its Profits, Suez canal 1869, Suez crisis 1956, The Wealth of Nations by Adam Smith, transfer pricing, Washington Consensus

This means that, in the absence of such data, which is still denied by the secrecy laws of many jurisdictions, we cannot know what risk we might face when trading with a company, trust or foundation located in a tax haven. This is the real reason why secrecy for such institutions is unacceptable: there is inbuilt moral hazard in any system when secrecy is granted to such entities, because that secrecy basically provides a licence to defraud that the unscrupulous can use with almost guaranteed impunity. The Reasons for Transparency Full disclosure of the accounts and beneficial ownership of these entities overcomes some of this risk.


pages: 199 words: 61,648

Having and Being Had by Eula Biss

Capital in the Twenty-First Century by Thomas Piketty, David Graeber, Donald Trump, Garrett Hardin, glass ceiling, Haight Ashbury, index fund, invisible hand, Jeff Bezos, Joan Didion, job satisfaction, Landlord’s Game, means of production, moral hazard, new economy, Norman Mailer, Occupy movement, precariat, Robert Shiller, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tragedy of the Commons, trickle-down economics, Upton Sinclair, wage slave, wages for housework

Maybe, he suggests, gambling doesn’t bother me, but I’d like to avoid directly investing in fossil fuels. That’s possible, to some extent. Or maybe I want to invest in companies that treat their workers well. I’ll have to choose a priority, he says, because the same company that offers a generous maternity leave might do something destructive to the environment. This is the moral hazard of diversification. Investment isn’t any more of a sin, I think, than gambling. But when shareholders profit at the expense of the workers who produce those profits, it’s a means of extraction. An economy of extraction is what we’re retiring on, those of us who get to retire. Amazon has stopped giving stock to hundreds of thousands of employees, while Jeff Bezos owns 16 percent of the company, making him the richest man in the world.


pages: 276 words: 59,165

Impact: Reshaping Capitalism to Drive Real Change by Ronald Cohen

"World Economic Forum" Davos, asset allocation, benefit corporation, biodiversity loss, carbon footprint, carbon tax, circular economy, commoditize, corporate governance, corporate social responsibility, crowdsourcing, decarbonisation, diversification, driverless car, Elon Musk, family office, financial independence, financial innovation, full employment, high net worth, housing crisis, impact investing, income inequality, invisible hand, Kickstarter, lockdown, Mark Zuckerberg, microbiome, minimum viable product, moral hazard, performance metric, risk-adjusted returns, risk/return, Silicon Valley, sovereign wealth fund, Steve Ballmer, Steve Jobs, tech worker, TED Talk, The Wealth of Nations by Adam Smith, transaction costs, zero-sum game

Its novel approach involves integrating the impact a company creates into its regular financial accounts. The goal is to create a framework through which the impact created by a company directly affects its value, in a similar way that its profit does. We will explore how this works in Chapter 4. A major benefit of impact measurement is that it prevents the moral hazard of ‘impact washing’, when a business falsely claims to engage in socially beneficial work. For some businesses today, such claims are little more than a marketing ploy. In order to authentically integrate impact into business and investment decision-making, impact must be dependably measured. The Role of Government Only governments have the power to require businesses and investors to measure and report on the impact of their activities according to uniform metrics.


pages: 221 words: 59,755

Under a White Sky: The Nature of the Future by Elizabeth Kolbert

Albert Einstein, Anthropocene, big-box store, clean water, coronavirus, COVID-19, CRISPR, Donald Davies, double helix, Hernando de Soto, Intergovernmental Panel on Climate Change (IPCC), Jacob Silverman, James Watt: steam engine, Kickstarter, lockdown, Maui Hawaii, moral hazard, negative emissions, ocean acidification, Stewart Brand, The Chicago School, We are as Gods, Whole Earth Catalog

“If you did not try to restore temperatures to pre-industrial levels, then the evidence from, really, all climate models is that most of the big climate hazards that people know about—extreme precipitation, extreme temperatures, changes in water availability, sea-level rise—are reduced,” he told me. This is true, he said, “basically everywhere, in the sense that there are no obvious regions that are made worse off. That result, I think, is really stunning.” I asked Keith about what is sometimes called the “moral hazard” problem. If people think geoengineering is going to avert the worst effects of climate change, won’t that reduce their motivation to cut emissions? He agreed this was a worry. But he said the opposite was also possible: “opening up the range of options” could inspire greater action. Solar geoengineering could potentially be used to “cut the top off” the risks of climate change.


pages: 247 words: 60,543

The Currency Cold War: Cash and Cryptography, Hash Rates and Hegemony by David G. W. Birch

"World Economic Forum" Davos, Alan Greenspan, algorithmic management, AlphaGo, bank run, Big Tech, bitcoin, blockchain, Bretton Woods, BRICs, British Empire, business cycle, capital controls, cashless society, central bank independence, COVID-19, cross-border payments, cryptocurrency, Diane Coyle, disintermediation, distributed ledger, Donald Trump, driverless car, Elon Musk, Ethereum, ethereum blockchain, facts on the ground, fault tolerance, fiat currency, financial exclusion, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, global reserve currency, global supply chain, global village, Hyman Minsky, information security, initial coin offering, Internet of things, Jaron Lanier, Kenneth Rogoff, knowledge economy, M-Pesa, Mark Zuckerberg, market clearing, market design, Marshall McLuhan, mobile money, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, new economy, Northern Rock, one-China policy, Overton Window, PalmPilot, pattern recognition, Pingit, QR code, quantum cryptography, race to the bottom, railway mania, ransomware, Real Time Gross Settlement, reserve currency, Satoshi Nakamoto, seigniorage, Silicon Valley, smart contracts, social distancing, sovereign wealth fund, special drawing rights, subscription business, the payments system, too big to fail, transaction costs, Vitalik Buterin, Washington Consensus

Without getting sidetracked discussing what the DeFi system might look like, it is fair to observe that it is hardly a fringe view that substituting new and better instruments for bank credit might actually pave the way for a more stable financial system. Stability A digital currency could increase financial stability by providing a risk-free alternative to bank accounts. This would boost stability by easing the concentration of liquidity risk and credit risk via, as an ECB working paper puts it, reducing moral hazard by downscaling banks (Bindseil 2020). This means that commercial banks would become credit brokers rather than credit creators, losing the private seigniorage attendant on credit creation. As a non-economist, I can see the attraction of reducing the systemic importance of ‘too big to fail’ institutions in order to abate the externalities stemming from potential instability in the banking system.


pages: 597 words: 172,130

The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin

"World Economic Forum" Davos, Alan Greenspan, Ayatollah Khomeini, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Sanders, break the buck, Bretton Woods, business climate, business cycle, capital controls, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency peg, eurozone crisis, financial engineering, financial innovation, Flash crash, foreign exchange controls, George Akerlof, German hyperinflation, Google Earth, hiring and firing, inflation targeting, Isaac Newton, Julian Assange, low cost airline, low interest rates, market bubble, market design, middle-income trap, Money creation, money market fund, moral hazard, mortgage debt, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, Paul Samuelson, price stability, public intellectual, quantitative easing, rent control, reserve currency, Robert Shiller, Robert Solow, rolodex, Ronald Reagan, Savings and loan crisis, savings glut, Socratic dialogue, sovereign wealth fund, The Great Moderation, too big to fail, union organizing, WikiLeaks, yield curve, Yom Kippur War

They also didn’t want to lend money to a bank that was built almost entirely on home lending. In continental Europe or the United States, this wouldn’t have been much of an issue, because the European Central Bank and the Federal Reserve had relaxed their emergency lending programs so banks like Northern Rock could get money on favorable terms. But King’s concerns about moral hazard meant that the Bank of England would offer no such accommodation until it was too late. When Northern Rock needed cash, it explored using its one branch in Ireland—part of the eurozone—to access money through the ECB. It concluded that getting the legal details in order would have taken two or three months—far too long to wait.

But while the other two members of the troika believed such negative ripple effects would happen only after a default, the IMF “saw serious risks of contagion, even under a strategy which tries to avoid default.” By the start of the summer of 2011, it was clear that Trichet’s passionate opposition was for naught. Where the ECB president saw questions of system-wide risk and moral hazard, just about everyone else saw a math problem with no other solution. That didn’t, however, include the Greek government, which had to that point considered any talk of debt restructuring as tantamount to treason. “Any talk of restructuring was a total taboo,” an anonymous Greek official told the New York Times.


pages: 526 words: 160,601

A Generation of Sociopaths: How the Baby Boomers Betrayed America by Bruce Cannon Gibney

1960s counterculture, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, AlphaGo, American Society of Civil Engineers: Report Card, Bear Stearns, Bernie Madoff, Bernie Sanders, Black Lives Matter, bond market vigilante , book value, Boston Dynamics, Bretton Woods, business cycle, buy and hold, carbon footprint, carbon tax, Charles Lindbergh, classic study, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate personhood, Corrections Corporation of America, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, dark matter, DeepMind, Deng Xiaoping, Donald Trump, Downton Abbey, Edward Snowden, Elon Musk, ending welfare as we know it, equal pay for equal work, failed state, financial deregulation, financial engineering, Francis Fukuyama: the end of history, future of work, gender pay gap, gig economy, Glass-Steagall Act, Haight Ashbury, Higgs boson, high-speed rail, Home mortgage interest deduction, Hyperloop, illegal immigration, impulse control, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jane Jacobs, junk bonds, Kitchen Debate, labor-force participation, Long Term Capital Management, low interest rates, Lyft, Mark Zuckerberg, market bubble, mass immigration, mass incarceration, McMansion, medical bankruptcy, Menlo Park, Michael Milken, military-industrial complex, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, Neil Armstrong, neoliberal agenda, Network effects, Nixon triggered the end of the Bretton Woods system, obamacare, offshore financial centre, oil shock, operation paperclip, plutocrats, Ponzi scheme, price stability, prosperity theology / prosperity gospel / gospel of success, quantitative easing, Ralph Waldo Emerson, RAND corporation, rent control, ride hailing / ride sharing, risk tolerance, Robert Shiller, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, school choice, secular stagnation, self-driving car, shareholder value, short selling, side project, Silicon Valley, smart grid, Snapchat, source of truth, stem cell, Steve Jobs, Stewart Brand, stock buybacks, survivorship bias, TaskRabbit, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, War on Poverty, warehouse robotics, We are all Keynesians now, white picket fence, Whole Earth Catalog, women in the workforce, Y2K, Yom Kippur War, zero-sum game

RN passed with broad bipartisan support, including from the White House, paving the way for financial industry consolidation over the next twenty years. Now, a bank could grow so long as it did not control more than 10 percent of the nation’s deposits—that would be the threshold for “too big to fail.”13 Maybe. Abstractly, RN was a fine idea; in practice, RN was fraught with moral hazard. Institutions below the 10 percent threshold had already been bailed out, like First Pennsylvania and Continental Illinois. The latter was, until the 2000s, one of the most spectacular and controversial bailouts, and Continental was just a baby bank compared to today’s monsters. Continental collapsed in 1984 after acquiring bad oil and gas loans (just the sort of asset now plaguing several Boomer-run banks).14 Continental’s salvation taught banks and depositors that they would not really face the sort of market discipline that was a core assumption of the free market theories supposedly driving deregulation.

Despite the cautionary tale of collapse and bailout under Republican Ronald Reagan, the strategy of risk and deregulation expanded under Bill Clinton, continued under his fellow Boomer Bush II, and has gone largely uncorrected under Barack Obama. In an act of macroeconomic heterodoxy, in every major case where laissez-faire consistency might have discomfited Wall Street, Washington provided a decidedly statist backstop. The deregulation, risk seeking, and moral hazard transcended party; it wasn’t so much ideology, as outlook. And that outlook was sociopathic. Monetary Manipulation and Generational Expropriation Stuck in the middle of this freewheeling disaster is the Federal Reserve, which sets monetary policy for the nation. Since 1977, it has been the unhappy duty of the Fed both to promote growth and ensure price stability (the “dual mandate”), while also serving as an important bank regulator.25 These goals often conflict, given that the Fed can overstimulate the economy by tolerating high inflation or allowing greater leverage.


pages: 1,239 words: 163,625

The Joys of Compounding: The Passionate Pursuit of Lifelong Learning, Revised and Updated by Gautam Baid

Abraham Maslow, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, Albert Einstein, Alvin Toffler, Andrei Shleifer, asset allocation, Atul Gawande, availability heuristic, backtesting, barriers to entry, beat the dealer, Benoit Mandelbrot, Bernie Madoff, bitcoin, Black Swan, book value, business process, buy and hold, Cal Newport, Cass Sunstein, Checklist Manifesto, Clayton Christensen, cognitive dissonance, collapse of Lehman Brothers, commoditize, corporate governance, correlation does not imply causation, creative destruction, cryptocurrency, Daniel Kahneman / Amos Tversky, deep learning, delayed gratification, deliberate practice, discounted cash flows, disintermediation, disruptive innovation, Dissolution of the Soviet Union, diversification, diversified portfolio, dividend-yielding stocks, do what you love, Dunning–Kruger effect, Edward Thorp, Elon Musk, equity risk premium, Everything should be made as simple as possible, fear index, financial independence, financial innovation, fixed income, follow your passion, framing effect, George Santayana, Hans Rosling, hedonic treadmill, Henry Singleton, hindsight bias, Hyman Minsky, index fund, intangible asset, invention of the wheel, invisible hand, Isaac Newton, it is difficult to get a man to understand something, when his salary depends on his not understanding it, Jeff Bezos, John Bogle, Joseph Schumpeter, junk bonds, Kaizen: continuous improvement, Kickstarter, knowledge economy, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, low interest rates, Mahatma Gandhi, mandelbrot fractal, margin call, Mark Zuckerberg, Market Wizards by Jack D. Schwager, Masayoshi Son, mental accounting, Milgram experiment, moral hazard, Nate Silver, Network effects, Nicholas Carr, offshore financial centre, oil shock, passive income, passive investing, pattern recognition, Peter Thiel, Ponzi scheme, power law, price anchoring, quantitative trading / quantitative finance, Ralph Waldo Emerson, Ray Kurzweil, Reminiscences of a Stock Operator, reserve currency, Richard Feynman, Richard Thaler, risk free rate, risk-adjusted returns, Robert Shiller, Savings and loan crisis, search costs, shareholder value, six sigma, software as a service, software is eating the world, South Sea Bubble, special economic zone, Stanford marshmallow experiment, Steve Jobs, Steven Levy, Steven Pinker, stocks for the long run, subscription business, sunk-cost fallacy, systems thinking, tail risk, Teledyne, the market place, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, time value of money, transaction costs, tulip mania, Upton Sinclair, Walter Mischel, wealth creators, Yogi Berra, zero-sum game

Martin describe law 229 of Hammurabi’s Code as “the best risk management rule”: The Hammurabi rule marks the separation between an agent’s interests and those of the client, or principal, she is supposed to represent. This is called the agency problem in the social sciences. Often closely associated is the problem of moral hazard, wherein an actor has incentive to behave in an economically or socially suboptimal manner (e.g., overly risky) because she does not bear all of the actual and/or potential costs of her action…. The Hammurabi rule solves the joint agency and moral hazard problem by ensuring that the agent has sufficient non-diversifiable risk to incent the agent to act in the joint interest of the agent and the principal.9 This moral principle is exactly what Seth Klarman refers to in his book Margin of Safety: You probably would not choose to dine at a restaurant whose chef always ate elsewhere.


pages: 237 words: 67,154

Ours to Hack and to Own: The Rise of Platform Cooperativism, a New Vision for the Future of Work and a Fairer Internet by Trebor Scholz, Nathan Schneider

1960s counterculture, activist fund / activist shareholder / activist investor, Airbnb, Amazon Mechanical Turk, Anthropocene, barriers to entry, basic income, benefit corporation, Big Tech, bitcoin, blockchain, Build a better mousetrap, Burning Man, business logic, capital controls, circular economy, citizen journalism, collaborative economy, collaborative editing, collective bargaining, commoditize, commons-based peer production, conceptual framework, content marketing, crowdsourcing, cryptocurrency, data science, Debian, decentralized internet, deskilling, disintermediation, distributed ledger, driverless car, emotional labour, end-to-end encryption, Ethereum, ethereum blockchain, food desert, future of work, gig economy, Google bus, hiring and firing, holacracy, income inequality, independent contractor, information asymmetry, Internet of things, Jacob Appelbaum, Jeff Bezos, job automation, Julian Assange, Kickstarter, lake wobegon effect, low skilled workers, Lyft, Mark Zuckerberg, means of production, minimum viable product, moral hazard, Network effects, new economy, offshore financial centre, openstreetmap, peer-to-peer, planned obsolescence, post-work, profit maximization, race to the bottom, radical decentralization, remunicipalization, ride hailing / ride sharing, Rochdale Principles, SETI@home, shareholder value, sharing economy, Shoshana Zuboff, Silicon Valley, smart cities, smart contracts, Snapchat, surveillance capitalism, TaskRabbit, technological solutionism, technoutopianism, transaction costs, Travis Kalanick, Tyler Cowen, Uber for X, uber lyft, union organizing, universal basic income, Vitalik Buterin, W. E. B. Du Bois, Whole Earth Catalog, WikiLeaks, women in the workforce, workplace surveillance , Yochai Benkler, Zipcar

Worker-owners in platform cooperatives may be working part-time, and there will be a need for ease of entry or exit. Another issue could arise around the amount of effort workers contribute. Although one hopes that workers who work for themselves and other workers will dedicate themselves to building their platform, cooperative endeavors could create moral hazard and the risk of shirking. The other challenge with crowd-work, where the work can be performed in any geographical location, is that there will be participants from many different countries, each with its own set of legal rules. The fact that there are no tailor-made enabling statutes geared specifically toward platform cooperatives contributes to increased setup costs and barriers to entry.


The Data Journalism Handbook by Jonathan Gray, Lucy Chambers, Liliana Bounegru

Amazon Web Services, barriers to entry, bioinformatics, business intelligence, carbon footprint, citizen journalism, correlation does not imply causation, crowdsourcing, data science, David Heinemeier Hansson, eurozone crisis, fail fast, Firefox, Florence Nightingale: pie chart, game design, Google Earth, Hans Rosling, high-speed rail, information asymmetry, Internet Archive, John Snow's cholera map, Julian Assange, linked data, machine readable, moral hazard, MVC pattern, New Journalism, openstreetmap, Ronald Reagan, Ruby on Rails, Silicon Valley, social graph, Solyndra, SPARQL, text mining, Wayback Machine, web application, WikiLeaks

We recall that this issue already exists within the news industry (where editors can impose changes on a journalist’s product), and it has existed within other media industries (such as the film industry, where conflicts between directors and studios over “final cuts” are hardly rare). It is not a particular moral hazard of stakeholder media, but it will not disappear, either. More attention is needed to the ethics of this growing reality and market. From a revenue standpoint, a single product or service is not enough. Successful watchdog enterprises would do better to take a portfolio approach, in which consulting, teaching, speaking, and other services bring in extra revenue and support the watchdog brand


pages: 254 words: 69,276

The Metric Society: On the Quantification of the Social by Steffen Mau

Airbnb, cognitive bias, cognitive load, collaborative consumption, connected car, crowdsourcing, digital capitalism, double entry bookkeeping, future of work, gamification, income inequality, informal economy, invisible hand, knowledge economy, labour market flexibility, lifelogging, Mark Zuckerberg, meritocracy, mittelstand, moral hazard, personalized medicine, positional goods, principal–agent problem, profit motive, QR code, reserve currency, school choice, selection bias, sharing economy, smart cities, subprime mortgage crisis, the scientific method, the strength of weak ties, Uber for X, vertical integration, web of trust, Wolfgang Streeck

When it comes to the principal–agent problem (Laffont & Martimort 2009) so often discussed in social science research (i.e. the question of how the ‘principal’ – or company – can ensure that the ‘agent’ – or employee – actually does what they are contracted to do), the delegation of evaluation can be a neat solution, offering an answer to information and control gaps or ‘moral hazard’ problems and providing the management with an unprecedented wealth of data. Feedback opportunities – the modern equivalent of the letter of complaint – are, however, increasingly morphing into evaluation requests bordering on harassment in the case of many companies. A single night's stay in a hotel can be followed by a barrage of emails which only stops with the completion of an online questionnaire.


pages: 267 words: 70,250

Defending the Free Market: The Moral Case for a Free Economy by Robert A. Sirico

Affordable Care Act / Obamacare, barriers to entry, Berlin Wall, corporate governance, creative destruction, delayed gratification, demographic winter, Fall of the Berlin Wall, financial engineering, Ford Model T, George Gilder, Gordon Gekko, greed is good, happiness index / gross national happiness, Herbert Marcuse, Hernando de Soto, informal economy, Internet Archive, liberation theology, means of production, moral hazard, obamacare, On the Revolutions of the Heavenly Spheres, Plato's cave, profit motive, road to serfdom, Tragedy of the Commons, zero-sum game

Federal Reserve held interest rates artificially low with the noble intention of encouraging banks (home lenders) to lend to borrowers (home buyers) they would not have otherwise lent to. The crisis was further worsened by the fact that the lending became politically driven. A free economy of borrowers and lenders didn’t create the housing collapse. Government interventions in the marketplace did. Moral hazards created by government manipulations debased the culture of mortgage lending. And when the inevitable disaster arrived, Washington’s answer was to impose more government interventions on the lending market—which was a bit like putting the weasel in charge of the henhouse he had just ransacked. Today, the U.S. government owns or guarantees the majority of mortgages in the United States—and more than 90 percent of new mortgages.12 Where people are free to own and use property, tyranny can never hold sway.


Better: A Surgeon's Notes on Performance by Atul Gawande

Atul Gawande, clean water, discovery of penicillin, facts on the ground, medical malpractice, moral hazard, Oklahoma City bombing, private military company, randomized controlled trial, stem cell, Timothy McVeigh

I was an intern then and in no position to pay for any significant part of his medical expenses. If my wife and I had had to, we would have bankrupted ourselves for him. But insurance meant that all anyone--either us or his doctors and nurses--had to consider was his needs. It was a beautiful thing. Yet it's also the source of what economists call "moral hazard": with other people paying the bills, I did not care how much was spent or charged to save my child. To me, all the members of the team deserved a million dollars for what they did. Others were footing the bill--so it's left to them to question the price. Hence the adversarial relationship patients and doctors have with insurers.


pages: 584 words: 187,436

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

Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, book value, Bretton Woods, business cycle, buy and hold, 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, deal flow, do well by doing good, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, Jim Simons, John Bogle, John Meriwether, junk bonds, Kenneth Rogoff, Kickstarter, Long Term Capital Management, low interest rates, machine translation, margin call, market bubble, market clearing, market fundamentalism, Market Wizards by Jack D. Schwager, Mary Meeker, merger arbitrage, Michael Milken, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, operational security, pattern recognition, Paul Samuelson, pre–internet, proprietary trading, public intellectual, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Mercer, rolodex, Savings and loan crisis, Sharpe ratio, short selling, short squeeze, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, tail risk, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs, two and twenty, uptick rule

Mutual-fund companies, which peddled money-market products that the government was forced to backstop? And which sort of future do the critics favor: one in which risk is concentrated inside giant banks for which taxpayers are on the hook, or one in which risk is dispersed across smaller hedge funds that expect no lifelines from the government? The crisis has compounded the moral hazard at the heart of finance: Banks that have been rescued can expect to be rescued all over again the next time they blow up; because of that expectation, they have weak incentives to avoid excessive risks, making blowup all too likely. Capitalism works only when institutions are forced to absorb the consequences of the risks that they take on.

The fact that the parent bank bailed out the hedge fund, as had happened at Bear Stearns, showed why the fund managers may have been less vigilant than their counterparts at independent funds with no deep-pocketed parents. J.P. Morgan analyst Stephen Wharton brought up this issue on Goldman’s conference call, organized to announce the recapitalization. “I mean do you feel there is some moral hazard being introduced here in terms of how investment banks are reacting to problematic hedge funds managed by their asset management arms?” Naturally, Goldman rejected the comparison, pointing out that it was providing $2 billion of the $3 billion recapitalization, with the rest coming from outside investors.


pages: 651 words: 180,162

Antifragile: Things That Gain From Disorder by Nassim Nicholas Taleb

"World Economic Forum" Davos, Air France Flight 447, Alan Greenspan, Andrei Shleifer, anti-fragile, banking crisis, Benoit Mandelbrot, Berlin Wall, biodiversity loss, Black Swan, business cycle, caloric restriction, caloric restriction, Chuck Templeton: OpenTable:, commoditize, creative destruction, credit crunch, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discrete time, double entry bookkeeping, Emanuel Derman, epigenetics, fail fast, financial engineering, financial independence, Flash crash, flying shuttle, Gary Taubes, George Santayana, Gini coefficient, Helicobacter pylori, Henri Poincaré, Higgs boson, high net worth, hygiene hypothesis, Ignaz Semmelweis: hand washing, informal economy, invention of the wheel, invisible hand, Isaac Newton, James Hargreaves, Jane Jacobs, Jim Simons, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, knowledge economy, language acquisition, Lao Tzu, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, Marc Andreessen, Mark Spitznagel, meta-analysis, microbiome, money market fund, moral hazard, mouse model, Myron Scholes, Norbert Wiener, pattern recognition, Paul Samuelson, placebo effect, Ponzi scheme, Post-Keynesian economics, power law, principal–agent problem, purchasing power parity, quantitative trading / quantitative finance, Ralph Nader, random walk, Ray Kurzweil, rent control, Republic of Letters, Ronald Reagan, Rory Sutherland, Rupert Read, selection bias, Silicon Valley, six sigma, spinning jenny, statistical model, Steve Jobs, Steven Pinker, Stewart Brand, stochastic process, stochastic volatility, synthetic biology, tacit knowledge, tail risk, Thales and the olive presses, Thales of Miletus, The Great Moderation, the new new thing, The Wealth of Nations by Adam Smith, Thomas Bayes, Thomas Malthus, too big to fail, transaction costs, urban planning, Vilfredo Pareto, Yogi Berra, Zipf's Law

Indeed, as in medicine, we tend to over-intervene in areas with minimal benefits (and large risks) while under-intervening in areas in which intervention is necessary, like emergencies. So the message here is in favor of staunch intervention in some areas, such as ecology or to limit the economic distortions and moral hazard caused by large corporations. What should we control? As a rule, intervening to limit size (of companies, airports, or sources of pollution), concentration, and speed are beneficial in reducing Black Swan risks. These actions may be devoid of iatrogenics—but it is hard to get governments to limit the size of government.

THE ETHICAL AND THE LEGAL I felt ashamed not having exposed the following scam for a long time. (As I said, if you see fraud …) Let us call it the Alan Blinder problem. The story is as follows. At Davos, during a private coffee conversation that I thought aimed at saving the world from, among other things, moral hazard and agency problems, I was interrupted by Alan Blinder, a former vice chairman of the Federal Reserve Bank of the United States, who tried to sell me a peculiar investment product that aims at legally hoodwinking taxpayers. It allowed the high net worth investor to get around the regulations limiting deposit insurance (at the time, $100,000) and benefit from coverage for near-unlimited amounts.


Blindside: How to Anticipate Forcing Events and Wild Cards in Global Politics by Francis Fukuyama

Asian financial crisis, banking crisis, Berlin Wall, Bletchley Park, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, cognitive bias, contact tracing, cuban missile crisis, currency risk, energy security, Fairchild Semiconductor, flex fuel, global pandemic, Herman Kahn, income per capita, informal economy, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John von Neumann, low interest rates, mass immigration, Menlo Park, Mikhail Gorbachev, moral hazard, Norbert Wiener, oil rush, oil shale / tar sands, oil shock, packet switching, RAND corporation, Ray Kurzweil, reserve currency, Ronald Reagan, The Wisdom of Crowds, trade route, Vannevar Bush, Vernor Vinge, Yom Kippur War

The share of stock market capitalization controlled by the top fifteen families was 62 percent in Indonesia, 38 percent in Korea, 28 percent in Malaysia, and 53 percent in Thailand. The banking system was also highly concentrated. The market share of the five leading banking institutions was 41 percent in Indonesia, 75 percent in Korea, 41 percent in Malaysia, and 70 percent in Thailand. The political links between business and government added a clear—but unrecognized—moral hazard dimension to the East Asian lending boom. Second, investors were confident that Japan would play a supporting role in the event of any financial problems because of its large investments and bank loans in the region. Japanese banks had 99 offices in East Asia during 1980, 313 in 1990, and 363 in 1994.


pages: 236 words: 77,735

Rigged Money: Beating Wall Street at Its Own Game by Lee Munson

affirmative action, Alan Greenspan, asset allocation, backtesting, barriers to entry, Bear Stearns, Bernie Madoff, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, call centre, Credit Default Swap, diversification, diversified portfolio, estate planning, fear index, fiat currency, financial engineering, financial innovation, fixed income, Flash crash, follow your passion, German hyperinflation, Glass-Steagall Act, global macro, High speed trading, housing crisis, index fund, joint-stock company, junk bonds, managed futures, Market Wizards by Jack D. Schwager, Michael Milken, military-industrial complex, money market fund, moral hazard, Myron Scholes, National best bid and offer, off-the-grid, passive investing, Ponzi scheme, power law, price discovery process, proprietary trading, random walk, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, risk/return, Savings and loan crisis, short squeeze, stocks for the long run, stocks for the long term, too big to fail, trade route, Vanguard fund, walking around money

If old and stodgy is your style, sit back for Chapter 11, where I explain why dividends matter and why on some level they’re irrelevant. Most importantly, I will tell you how all these things get turned into a pitch which Wall Street cares about nothing except selling you something. To top it off, I unveil the New Scam. Thanks to deregulation and a complete disregard for moral hazard, we start a new century with banking and brokerage joined together like it was 100 years ago, with essentially the same effect: bedlam. Ladies and gentlemen, I give you the rigged game! Additional Materials For updates and more information, go to www.riggedmoney.com. Acknowledgments I’d like to thank acquisition editor Laura Walsh for her passion behind the project and Judy Howarth for putting up with my writing.


pages: 206 words: 9,776

Rebel Cities: From the Right to the City to the Urban Revolution by David Harvey

Alan Greenspan, Bretton Woods, business cycle, collateralized debt obligation, commoditize, creative destruction, David Graeber, deindustrialization, financial innovation, Garrett Hardin, gentrification, Guggenheim Bilbao, Hernando de Soto, high-speed rail, housing crisis, illegal immigration, indoor plumbing, invisible hand, Jane Jacobs, late capitalism, Lewis Mumford, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, means of production, military-industrial complex, moral hazard, mortgage debt, mortgage tax deduction, Murray Bookchin, New Urbanism, Ponzi scheme, precariat, profit maximization, race to the bottom, radical decentralization, Robert Shiller, Savings and loan crisis, special economic zone, the built environment, the High Line, The Wealth of Nations by Adam Smith, Tragedy of the Commons, transcontinental railway, urban planning, We are the 99%, William Langewiesche, Works Progress Administration

Th e subsequent New York City fiscal crisis of 1 975 was hugely important b ecause at that time it controlled one of the largest public budgets in the world (prompting pleas from the French president and the West German chancellor to bail 32 R E B E L C I T I ES New York City out to avoid a global implosion in financial markets) . New York then became the center for the invention of neoliberal practices of gifting moral hazard to the investment banks and making the people pay up through the restructuring of municipal contracts and services. The impact of the most recent property market crash has also carried over into the virtual bankruptcy of states like California, visiting huge stresses in state and municipal government finance and government employment on almost everywhere in the US.


pages: 253 words: 79,214

The Money Machine: How the City Works by Philip Coggan

activist fund / activist shareholder / activist investor, algorithmic trading, asset-backed security, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, bond market vigilante , bonus culture, Bretton Woods, call centre, capital controls, carried interest, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, disintermediation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, endowment effect, financial deregulation, financial independence, floating exchange rates, foreign exchange controls, Glass-Steagall Act, guns versus butter model, Hyman Minsky, index fund, intangible asset, interest rate swap, inverted yield curve, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", joint-stock company, junk bonds, labour market flexibility, large denomination, London Interbank Offered Rate, Long Term Capital Management, low interest rates, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, negative equity, Nick Leeson, Northern Rock, pattern recognition, proprietary trading, purchasing power parity, quantitative easing, reserve currency, Right to Buy, Ronald Reagan, shareholder value, South Sea Bubble, sovereign wealth fund, technology bubble, time value of money, too big to fail, tulip mania, Washington Consensus, yield curve, zero-coupon bond

It organized a rescue package for Johnson Matthey in 1984, for example, but found it could not do so when Barings got into trouble. But, as was clear in the Northern Rock crisis, the Bank has to balance its desire to help an individual institution with the need to protect the system. This is where the idea of ‘moral hazard’ comes in. If we rescue banks every time they get in trouble, then there will be no incentive for banks to avoid trouble; it will be heads they win (in the former of higher bonuses and share prices) and tails, we (the taxpayer) lose. Initially, the Bank of England felt that banks had been reckless in their involvement with US subprime lending and should be punished.


pages: 491 words: 77,650

Humans as a Service: The Promise and Perils of Work in the Gig Economy by Jeremias Prassl

3D printing, Affordable Care Act / Obamacare, Airbnb, algorithmic management, Amazon Mechanical Turk, Andrei Shleifer, asset light, autonomous vehicles, barriers to entry, call centre, cashless society, Clayton Christensen, collaborative consumption, collaborative economy, collective bargaining, creative destruction, crowdsourcing, death from overwork, Didi Chuxing, disruptive innovation, Donald Trump, driverless car, Erik Brynjolfsson, full employment, future of work, George Akerlof, gig economy, global supply chain, Greyball, hiring and firing, income inequality, independent contractor, information asymmetry, invisible hand, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kevin Roose, Kickstarter, low skilled workers, Lyft, machine readable, Mahatma Gandhi, Mark Zuckerberg, market friction, means of production, moral hazard, Network effects, new economy, obamacare, pattern recognition, platform as a service, Productivity paradox, race to the bottom, regulatory arbitrage, remote working, ride hailing / ride sharing, Robert Gordon, Ronald Coase, Rosa Parks, scientific management, Second Machine Age, secular stagnation, self-driving car, shareholder value, sharing economy, Silicon Valley, Silicon Valley billionaire, Silicon Valley ideology, Simon Singh, software as a service, Steve Jobs, TaskRabbit, TechCrunch disrupt, The Future of Employment, The Market for Lemons, The Nature of the Firm, The Rise and Fall of American Growth, transaction costs, transportation-network company, Travis Kalanick, two tier labour market, two-sided market, Uber and Lyft, Uber for X, uber lyft, union organizing, warehouse automation, work culture , working-age population

In their worked example of airbnb (a property rental business), they suggest: [delegating] regulatory responsibility relating to information asymmetry to plat- forms like Airbnb (whose interests are naturally aligned with the global aggregation of information and the mitigation of adverse selection and moral hazard), and let [local housing associations] play a key role in the regulation of local externalities, as the guest-noise and strangers-in-the-building externalities are typically local and primarily affect [the association’s] membership. * * * Notes 153 22. Sharing Economy UK, ‘Code of conduct’, http://www.sharingeconomyuk.


Where Does Money Come From?: A Guide to the UK Monetary & Banking System by Josh Ryan-Collins, Tony Greenham, Richard Werner, Andrew Jackson

bank run, banking crisis, banks create money, Basel III, Big bang: deregulation of the City of London, book value, Bretton Woods, business cycle, capital controls, cashless society, central bank independence, credit crunch, currency risk, double entry bookkeeping, en.wikipedia.org, eurozone crisis, fiat currency, financial innovation, fixed income, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, Goodhart's law, Hyman Minsky, inflation targeting, interest rate derivative, interest rate swap, Joseph Schumpeter, low skilled workers, market clearing, market design, market friction, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Northern Rock, offshore financial centre, Post-Keynesian economics, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, Real Time Gross Settlement, reserve currency, Ronald Reagan, seigniorage, special drawing rights, the payments system, trade route, transaction costs

The fact that there are no restrictions on the Bank of England’s ability to buy up government debt is one of the reasons that interest rates on UK government bonds have remained low. In contrast, the Eurozone economies, locked in to a fixed exchange rate regime with 17 other countries, must depend on the European Central Bank (ECB) to prevent sovereign defaults. The ECB fears ‘moral hazard’ – that states will take ECB interventions for granted if interest rates on their borrowing become too high and lose ‘fiscal discipline’, i.e. continue to run up budget deficits safe in the knowledge the ECB will bail them out. There is also a free rider problem – in contrast to the UK where monetisation of debt will only affect the UK, in Europe the monetisation of debt will affect (and be paid for by) all countries.


pages: 229 words: 75,606

Two and Twenty: How the Masters of Private Equity Always Win by Sachin Khajuria

"World Economic Forum" Davos, affirmative action, bank run, barriers to entry, Big Tech, blockchain, business cycle, buy and hold, carried interest, COVID-19, credit crunch, data science, decarbonisation, disintermediation, diversification, East Village, financial engineering, gig economy, glass ceiling, high net worth, hiring and firing, impact investing, index fund, junk bonds, Kickstarter, low interest rates, mass affluent, moral hazard, passive investing, race to the bottom, random walk, risk/return, rolodex, Rubik’s Cube, Silicon Valley, sovereign wealth fund, two and twenty, Vanguard fund, zero-sum game

A property claim on a shipping fleet policy in Canada is not going to precipitate a claim on an entertainment business interruption policy in California. And not only are the lines not correlated with each other, they are also not directly correlated to what is happening in the macro economy. There is some overlap and some moral hazard—as claims tend to go up when money is tight—but this is not a traditional cyclical business that reacts the same way when the rest of the economy is being hit. In fact, as the deal team sees it, the forces of supply and demand in insurance are favorable, with prices for policies “hardening,” or going up, even if the economic picture for other industries has dimmed.


pages: 257 words: 77,612

The Rebel and the Kingdom: The True Story of the Secret Mission to Overthrow the North Korean Regime by Bradley Hope

Airbnb, battle of ideas, bitcoin, blockchain, cognitive dissonance, colonial rule, COVID-19, cryptocurrency, digital map, Donald Trump, Dr. Strangelove, failed state, Francis Fukuyama: the end of history, Great Leap Forward, Jeff Bezos, Kickstarter, moral hazard, Nelson Mandela, off-the-grid, operational security, Potemkin village, restrictive zoning, Ronald Reagan, Saturday Night Live, Silicon Valley, South China Sea, TED Talk, uranium enrichment, WikiLeaks

They might have avoided greater bloodshed, but a whole generation of North Korean officials took away the lesson that they could carry out actions without fear of repercussion. In fact, the more dangerous the face they projected to the world, the less likely they would be invaded. It was a dangerous moral hazard that made North Korea stronger. “By not suffering the consequences, North Korea’s calculus changed,” said one longtime North Korea policy hand. By November 2016, however, the Obama team, meeting with Trump’s new advisers, had a message: The policy of strategic patience might no longer be viable


pages: 286 words: 82,970

A World in Disarray: American Foreign Policy and the Crisis of the Old Order by Richard Haass

access to a mobile phone, anti-communist, Berlin Wall, Bretton Woods, carbon footprint, carbon tax, central bank independence, colonial rule, cuban missile crisis, currency manipulation / currency intervention, deindustrialization, Doha Development Round, Donald Trump, Edward Snowden, energy security, European colonialism, failed state, Fall of the Berlin Wall, floating exchange rates, global pandemic, global reserve currency, guns versus butter model, hiring and firing, immigration reform, invisible hand, low interest rates, Mikhail Gorbachev, Monroe Doctrine, moral hazard, mutually assured destruction, no-fly zone, open economy, quantitative easing, RAND corporation, reserve currency, Ronald Reagan, South China Sea, special drawing rights, Steven Pinker, Suez crisis 1956, UNCLOS, UNCLOS, uranium enrichment, Yom Kippur War

At the same time, this support for friends and allies cannot be unconditional. They must understand that with U.S. support comes the responsibility on their part not to act recklessly or provocatively. This applies to formal allies as well as to Taiwan. The concept that comes to mind here, one familiar to investors, is “moral hazard.” The United States needs to be sufficiently supportive so that other countries will not doubt U.S. commitments and act independently, but not so supportive that other governments will assume that irresponsible behavior will automatically be underwritten by the United States. As should be obvious, getting the balance right between guaranteeing necessary support and not granting license is easier described than implemented.


pages: 329 words: 85,471

The Locavore's Dilemma by Pierre Desrochers, Hiroko Shimizu

air freight, back-to-the-land, biodiversity loss, Biosphere 2, British Empire, Columbian Exchange, Community Supported Agriculture, creative destruction, edge city, Edward Glaeser, food desert, food miles, Food sovereignty, global supply chain, Great Leap Forward, Gregor Mendel, intermodal, invention of agriculture, inventory management, invisible hand, Jane Jacobs, land tenure, megacity, moral hazard, mortgage debt, oil shale / tar sands, oil shock, peak oil, planetary scale, precautionary principle, profit motive, refrigerator car, Steven Pinker, tacit knowledge, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, trade liberalization, Tragedy of the Commons, Tyler Cowen, Upton Sinclair, urban sprawl

id=W1ZbAAAAQAAJ&hl=fr&source=gbs_navlinks_s For recent historical scholarship on the effectiveness of some past European and Chinese granaries, see, among others, Olivier Zeller. 1989. “Politique frumentaire et rapports sociaux à Lyon, 1772-1776.” Histoire, Économie et Société 8 (2): 249–286 http://www.persee.fr/web/revues/home/prescript/article/hes_0752-5702_1989_num_8_2_2368; and Carol H. Shiue. 2004. “Local Granaries and Central Government Disaster Relief: Moral Hazard and Intergovernmental Finance in Eighteenth and Nineteenth Century China.” Journal of Economic History 64 (1):100–124. 21 William Harte. 1764. Essays on Husbandry. W. Frederick, p. 51 (adapted to modern English by the writers) http://books.google.com/books?id=DaI1AAAAMAAJ&source=gbs_navlinks_s. 22 Joachim von Braun and Maximo Torero. 2009.


pages: 302 words: 84,428

Mastering the Market Cycle: Getting the Odds on Your Side by Howard Marks

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, behavioural economics, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial engineering, financial innovation, fixed income, Glass-Steagall Act, if you build it, they will come, income inequality, Isaac Newton, job automation, junk bonds, Long Term Capital Management, low interest rates, margin call, Michael Milken, money market fund, moral hazard, new economy, profit motive, quantitative easing, race to the bottom, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, secular stagnation, short selling, South Sea Bubble, stocks for the long run, superstar cities, The Chicago School, The Great Moderation, transaction costs, uptick rule, VA Linux, Y2K, yield curve

With lenders being paid fees simply for making loans—and able to sell them off immediately and thus retain no risk of default—there was no reason for them to worry about the creditworthiness of their borrowers. Clearly this gave them perverse incentives. (Incentives like these—which allow participants to engage in pro-risk behavior without having to worry about the consequences—were described in the Global Financial Crisis as creating “moral hazard,” a term that came into widespread use. While it’s heard less often these days, the concept survives, and it remains dangerous.) The key to the purported success of sub-prime mortgage backed securities lay in “financial engineering” performed by “quants” and Ph.D.’s, many of them in their first jobs.


pages: 267 words: 82,580

The Dark Net by Jamie Bartlett

3D printing, 4chan, bitcoin, blockchain, brain emulation, carbon footprint, Cody Wilson, creative destruction, crowdsourcing, cryptocurrency, degrowth, deindustrialization, Edward Snowden, end-to-end encryption, eternal september, Filter Bubble, Francis Fukuyama: the end of history, Free Software Foundation, global village, Google Chrome, Great Leap Forward, Howard Rheingold, Internet of things, invention of writing, Johann Wolfgang von Goethe, John Gilmore, John Perry Barlow, Julian Assange, Kuwabatake Sanjuro: assassination market, Lewis Mumford, life extension, litecoin, longitudinal study, Mark Zuckerberg, Marshall McLuhan, Mondo 2000, moral hazard, moral panic, Nick Bostrom, Occupy movement, pre–internet, printed gun, Ray Kurzweil, rewilding, Ross Ulbricht, Satoshi Nakamoto, Skype, slashdot, synthetic biology, technological singularity, technoutopianism, Ted Kaczynski, TED Talk, The Coming Technological Singularity, Turing test, Vernor Vinge, WikiLeaks, Zimmermann PGP

He recounts that during the Cold War, Soviet cyphers were too strong for GCHQ to break, so British intelligence switched to recruiting more Soviet agents. If the state considers you to be a legitimate target for security investigation but can’t track your online activity using an anonymous browser, they’ll put a bug in your bedroom instead. He predicts more agents and intrusive operations in future, ‘which is typically more morally hazardous’. For the cypherpunks, the fact that criminals use encryption is an unfortunate outcome, but a cost worth paying for the extra freedom it provides. Zimmermann has been asked repeatedly how he feels that the 9/11 hijackers might have used software he designed. It was, he says, far outweighed by the fact PGP is ‘a tool for human rights around the world . . . strong crypto does more good for a democratic society than harm.’


pages: 791 words: 85,159

Social Life of Information by John Seely Brown, Paul Duguid

Alvin Toffler, business process, Charles Babbage, Claude Shannon: information theory, computer age, Computing Machinery and Intelligence, cross-subsidies, disintermediation, double entry bookkeeping, Frank Gehry, frictionless, frictionless market, future of work, George Gilder, George Santayana, global village, Goodhart's law, Howard Rheingold, informal economy, information retrieval, invisible hand, Isaac Newton, John Markoff, John Perry Barlow, junk bonds, Just-in-time delivery, Kenneth Arrow, Kevin Kelly, knowledge economy, knowledge worker, lateral thinking, loose coupling, Marshall McLuhan, medical malpractice, Michael Milken, moral hazard, Network effects, new economy, Productivity paradox, Robert Metcalfe, rolodex, Ronald Coase, scientific management, shareholder value, Shoshana Zuboff, Silicon Valley, Steve Jobs, Superbowl ad, tacit knowledge, Ted Nelson, telepresence, the medium is the message, The Nature of the Firm, the strength of weak ties, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, Turing test, Vannevar Bush, Y2K

This battle between geometric growth and arithmetic growth is an interesting echo of the discussions of the growth of technology and human society that we discussed in chapter 3. Page 277 43. The sociologist Anthony Giddens has long emphasized the importance of reflection to human society. Emphasis on human reflexivity doesn't lurk in the "softer" social sciences alone. It appears in the work of the financier George Soros and in such obscure economic issues as "moral hazard." It is certainly hazardous to exclude it from accounts of human society. 44. Spender and Grant, 1996, p. 9. Chapter 7: Reading the Background 1. Bits may be environmentally friendly, but computers, of course, are not. The European Community has issued a directive (Directive on Waste from Electrical and Electronic Equipment) demanding that manufacturers take responsibility for postconsumer recycling in order to limit the problem of computer trash (Vernon, 1999). 2.


pages: 286 words: 87,168

Less Is More: How Degrowth Will Save the World by Jason Hickel

air freight, Airbnb, Anthropocene, basic income, Bernie Sanders, Big bang: deregulation of the City of London, biodiversity loss, Boris Johnson, Bretton Woods, British Empire, capital controls, circular economy, cognitive dissonance, coronavirus, corporate governance, corporate personhood, cotton gin, COVID-19, David Graeber, decarbonisation, declining real wages, degrowth, deindustrialization, dematerialisation, disinformation, Elon Musk, energy transition, Extinction Rebellion, extractivism, Fairphone, Fellow of the Royal Society, flying shuttle, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, gender pay gap, green new deal, Greta Thunberg, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of the steam engine, James Watt: steam engine, Jeff Bezos, Jevons paradox, John Maynard Keynes: Economic Possibilities for our Grandchildren, land reform, liberal capitalism, lockdown, longitudinal study, low interest rates, Mahatma Gandhi, Mark Zuckerberg, McMansion, means of production, meta-analysis, microbiome, Money creation, moral hazard, mortgage debt, Murray Bookchin, Naomi Klein, negative emissions, new economy, ocean acidification, offshore financial centre, oil shale / tar sands, opioid epidemic / opioid crisis, out of africa, passive income, planetary scale, planned obsolescence, plutocrats, Post-Keynesian economics, quantitative easing, rent control, rent-seeking, retail therapy, Ronald Reagan, Rupert Read, Scramble for Africa, secular stagnation, shareholder value, sharing economy, Simon Kuznets, structural adjustment programs, the scientific method, The Spirit Level, transatlantic slave trade, trickle-down economics, universal basic income

We are limited only by our imagination! There’s no reason we can’t have our incomes rising for ever while we nonetheless consume less material stuff each year. And here they are right. There’s no a priori reason why such a thing can’t happen in theory, in a magical alternative world. But there’s a certain moral hazard at stake when we start trafficking in fairy tales – telling people not to worry because eventually, somehow, GDP will de-link from resource use and we’ll be in the clear. In an era of climate emergency and mass extinction, we don’t have time to speculate about imaginary possibilities. We don’t have time to wait for this juggernaut of ecological destruction to suddenly stop being destructive, when all the evidence says it won’t happen.


pages: 291 words: 85,908

The Skripal Files by Mark Urban

Berlin Wall, Boris Johnson, disinformation, Donald Trump, drone strike, fake news, Fall of the Berlin Wall, false flag, Jeremy Corbyn, Mikhail Gorbachev, military-industrial complex, moral hazard, Robert Hanssen: Double agent, Skype

At MI6, where John Scarlett had become chief in 2004, Litvinenko’s murder derailed the twin-track policy he had long favoured – of maintaining liaison relationships with the Russians while at the same time upping the espionage effort against them. Cooperation with the SVR had to be suspended as these events subtly strengthened the hand of those in his service and elsewhere who saw profound moral hazard in cosying up to Putin and his dubious friends. And what of the importance of Litvinenko’s tragedy to Sergei Skripal? The murder was instructive in many ways: in showing the willingness of elements within Russia to murder in the UK; in the use of a rare poison that was traced back to a state institution; and in establishing how the Kremlin would respond to the grave accusation of sponsoring assassination overseas.


pages: 306 words: 82,909

A Hacker's Mind: How the Powerful Bend Society's Rules, and How to Bend Them Back by Bruce Schneier

4chan, Airbnb, airport security, algorithmic trading, Alignment Problem, AlphaGo, Automated Insights, banking crisis, Big Tech, bitcoin, blockchain, Boeing 737 MAX, Brian Krebs, Capital in the Twenty-First Century by Thomas Piketty, cloud computing, computerized trading, coronavirus, corporate personhood, COVID-19, cryptocurrency, dark pattern, deepfake, defense in depth, disinformation, Donald Trump, Double Irish / Dutch Sandwich, driverless car, Edward Thorp, Elon Musk, fake news, financial innovation, Financial Instability Hypothesis, first-past-the-post, Flash crash, full employment, gig economy, global pandemic, Goodhart's law, GPT-3, Greensill Capital, high net worth, Hyman Minsky, income inequality, independent contractor, index fund, information security, intangible asset, Internet of things, Isaac Newton, Jeff Bezos, job automation, late capitalism, lockdown, Lyft, Mark Zuckerberg, money market fund, moral hazard, move fast and break things, Nate Silver, offshore financial centre, OpenAI, payday loans, Peter Thiel, precautionary principle, Ralph Nader, recommendation engine, ride hailing / ride sharing, self-driving car, sentiment analysis, Skype, smart cities, SoftBank, supply chain finance, supply-chain attack, surveillance capitalism, systems thinking, TaskRabbit, technological determinism, TED Talk, The Wealth of Nations by Adam Smith, theory of mind, TikTok, too big to fail, Turing test, Uber and Lyft, uber lyft, ubercab, UNCLOS, union organizing, web application, WeWork, When a measure becomes a target, WikiLeaks, zero day

They must weigh the benefits of success with the costs of failure, and their eventual decision will consider both. Directors of an enterprise deemed too crucial to fail, on the other hand, know that the inevitable costs of any poor decisions they might make will be paid by taxpayers: that is, by society as a whole. This creates moral hazard and incentivizes risky decision-making. If they’re successful, they’ll win. And if they’re unsuccessful, they’re protected from loss. “Too big to fail” is an insurance policy against bad bets. It drastically perturbs our market system. It’s a distortion fueled by money and power. And it’s a hack.


pages: 1,535 words: 337,071

Networks, Crowds, and Markets: Reasoning About a Highly Connected World by David Easley, Jon Kleinberg

Albert Einstein, AltaVista, AOL-Time Warner, Apollo 13, classic study, clean water, conceptual framework, Daniel Kahneman / Amos Tversky, Douglas Hofstadter, Dutch auction, Erdős number, experimental subject, first-price auction, fudge factor, Garrett Hardin, George Akerlof, Gerard Salton, Gerard Salton, Gödel, Escher, Bach, incomplete markets, information asymmetry, information retrieval, John Nash: game theory, Kenneth Arrow, longitudinal study, market clearing, market microstructure, moral hazard, Nash equilibrium, Network effects, Pareto efficiency, Paul Erdős, planetary scale, power law, prediction markets, price anchoring, price mechanism, prisoner's dilemma, random walk, recommendation engine, Richard Thaler, Ronald Coase, sealed-bid auction, search engine result page, second-price auction, second-price sealed-bid, seminal paper, Simon Singh, slashdot, social contagion, social web, Steve Jobs, Steve Jurvetson, stochastic process, Ted Nelson, the long tail, The Market for Lemons, the strength of weak ties, The Wisdom of Crowds, trade route, Tragedy of the Commons, transaction costs, two and twenty, ultimatum game, Vannevar Bush, Vickrey auction, Vilfredo Pareto, Yogi Berra, zero-sum game

First, a seller interested in misbehaving can build up the reputation of a particular identity so that buyers will trust it, then behave badly until its reputation gets seriously damaged, discard the identity in favor of a freshly created one, and start the process again. In other words, the reputational consequences of bad behavior can be mitigated on-line if it is there is an easy way to “start over” by simply registering a new identity on the site. This ability to start over adds a severe moral-hazard feature to the on-line transaction problem, just like the ability of an individual to affect his health status adds a moral-hazard component to health insurance. This makes the problem of creating a reliable reputation system more difficult than it would be if there were only an adverse-selection problem. In addition, the design of a reputation system is further complicated by the potential for other kinds of misleading seller behavior.

If these actions are not observable to the insurance company then we have a new source of information asymmetry, since each individual knows more about his future behavior than the insurance company does. Once an individual purchases health insurance, his incentive to undertake costly actions to maintain his health is reduced, since he no longer bears the full cost of poor health. This introduces an effect known as moral hazard: when you’re shielded from the full cost of your potential bad behavior, you have less incentive to avoid engaging in it. Information Asymmetry in Trading and the Stock Market. It is useful to reflect further on these examples in light of one of the basic lessons of this chapter: that in any trade, each trader should ask why whoever is on the other side of the trade wants to make the trade.


pages: 340 words: 92,904

Street Smart: The Rise of Cities and the Fall of Cars by Samuel I. Schwartz

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, active transport: walking or cycling, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, autonomous vehicles, bike sharing, car-free, City Beautiful movement, collaborative consumption, congestion charging, congestion pricing, crowdsourcing, desegregation, Donald Shoup, driverless car, Enrique Peñalosa, Ford Model T, Ford paid five dollars a day, Frederick Winslow Taylor, high-speed rail, if you build it, they will come, Induced demand, intermodal, invention of the wheel, lake wobegon effect, Lewis Mumford, Loma Prieta earthquake, longitudinal study, Lyft, Masdar, megacity, meta-analysis, moral hazard, Nate Silver, oil shock, parking minimums, Productivity paradox, Ralph Nader, rent control, ride hailing / ride sharing, Rosa Parks, scientific management, self-driving car, skinny streets, smart cities, smart grid, smart transportation, TED Talk, the built environment, the map is not the territory, transportation-network company, Uber and Lyft, Uber for X, uber lyft, Unsafe at Any Speed, urban decay, urban planning, urban renewal, walkable city, Wall-E, white flight, white picket fence, Works Progress Administration, Yogi Berra, Zipcar

Utility holding companies declined from 216 in 1938 (when the Act went into effect) to 18 by 1950. The objective of Rayburn-Wheeler wasn’t to enrich the competitors of America’s streetcar companies. It was to reduce the potential for abuse. And the potential was definitely there. Unregulated streetcar companies that were owned by electric utilities were a classic moral hazard: whenever the parent company needed to improve its own bottom line, it could require its transit subsidiary to buy electricity at higher-than-market rates. If the streetcar company operated at a loss, no one cared. Even the automobile companies didn’t care about the accounting tricks that utilities were able to play on the public, and there’s no record that any of them lobbied for the provision in Rayburn-Wheeler that forced utilities to sell their streetcar companies.


pages: 291 words: 91,783

Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America by Matt Taibbi

addicted to oil, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Bear Stearns, Bernie Sanders, Bretton Woods, buy and hold, carried interest, classic study, clean water, collateralized debt obligation, collective bargaining, computerized trading, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, desegregation, diversification, diversified portfolio, Donald Trump, financial innovation, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Greenspan put, illegal immigration, interest rate swap, laissez-faire capitalism, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, medical malpractice, military-industrial complex, money market fund, moral hazard, mortgage debt, Nixon triggered the end of the Bretton Woods system, obamacare, passive investing, Ponzi scheme, prediction markets, proprietary trading, prudent man rule, quantitative easing, reserve currency, Ronald Reagan, Savings and loan crisis, Sergey Aleynikov, short selling, sovereign wealth fund, too big to fail, trickle-down economics, Y2K, Yom Kippur War

A Cleveland Fed official named Jerry Jordan even expressed the idea with somewhat seditious clarity in 1998: I have seen—probably everybody has now seen—newsletters, advisory letters, talking heads at CNBC, and so on saying there is no risk that the stock market is going to go down because even if it started down, the Fed would ease policy to prop it back up. Eventually, the Iowa professor Paul Weller, along with University of Warwick professors Marcus Miller and Lei Zhang, would formally identify this concept in a paper called “Moral Hazard and the U.S. Stock Market: Analyzing the ‘Greenspan Put.’ ” By then, however, the term “Greenspan put” had been around for years, and the very fact that it was now being formally studied is evidence of the profound effect it had on the markets. “Investors came to believe in something the Fed couldn’t really deliver,” says Weller now.


pages: 278 words: 93,540

The Full Catastrophe: Travels Among the New Greek Ruins by James Angelos

bank run, Berlin Wall, centre right, death of newspapers, disinformation, Fall of the Berlin Wall, ghettoisation, illegal immigration, income inequality, moral hazard, plutocrats, urban planning

The punitive nature of the initial bailout agreement—the bringing out of the bats, in other words—somewhat quieted the German electorate’s misgivings about helping the Greeks. German chancellor Angela Merkel made sure to emphasize the toughness of the agreement to her voters, assuring them the Greeks were being adequately chastened, that moral hazard was being avoided. Other eurozone countries would “do all they can to avoid this themselves,” Merkel told the German newspaper Bild am Sonntag after Greece’s first bailout. For their part, many Greeks did everything they could to avoid it too. One might imagine the somber mood around a company office after the management announces employee wage cuts and a downsizing plan.


pages: 265 words: 93,231

The Big Short: Inside the Doomsday Machine by Michael Lewis

Alan Greenspan, An Inconvenient Truth, Asperger Syndrome, asset-backed security, Bear Stearns, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, facts on the ground, financial engineering, financial innovation, fixed income, forensic accounting, Gordon Gekko, high net worth, housing crisis, illegal immigration, income inequality, index fund, interest rate swap, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, medical residency, Michael Milken, money market fund, moral hazard, mortgage debt, pets.com, Ponzi scheme, Potemkin village, proprietary trading, quantitative trading / quantitative finance, Quicken Loans, risk free rate, Robert Bork, short selling, Silicon Valley, tail risk, the new new thing, too big to fail, value at risk, Vanguard fund, zero-sum game

By the mid-1990s, dozens of small consumer lending companies were coming to market each year. The subprime lending industry was fragmented. Because the lenders sold many--though not all--of the loans they made to other investors, in the form of mortgage bonds, the industry was also fraught with moral hazard. "It was a fast-buck business," says Jacobs. "Any business where you can sell a product and make money without having to worry how the product performs is going to attract sleazy people. That was the seamy underbelly of the good idea. Eisman and I both believed in the big idea and we both met some really sleazy characters.


pages: 332 words: 89,668

Two Nations, Indivisible: A History of Inequality in America: A History of Inequality in America by Jamie Bronstein

Affordable Care Act / Obamacare, back-to-the-land, barriers to entry, basic income, Bernie Sanders, big-box store, Black Lives Matter, blue-collar work, Branko Milanovic, British Empire, Capital in the Twenty-First Century by Thomas Piketty, clean water, cognitive dissonance, collateralized debt obligation, collective bargaining, Community Supported Agriculture, corporate personhood, crony capitalism, deindustrialization, desegregation, Donald Trump, ending welfare as we know it, Frederick Winslow Taylor, full employment, Gini coefficient, Glass-Steagall Act, income inequality, interchangeable parts, invisible hand, job automation, John Maynard Keynes: technological unemployment, labor-force participation, land reform, land tenure, longitudinal study, low skilled workers, low-wage service sector, mandatory minimum, mass incarceration, minimum wage unemployment, moral hazard, moral panic, mortgage debt, New Urbanism, non-tariff barriers, obamacare, occupational segregation, Occupy movement, oil shock, plutocrats, price discrimination, race to the bottom, rent control, road to serfdom, Ronald Reagan, Sam Peltzman, scientific management, Scientific racism, Simon Kuznets, single-payer health, Strategic Defense Initiative, strikebreaker, the long tail, too big to fail, trade route, transcontinental railway, Triangle Shirtwaist Factory, trickle-down economics, universal basic income, Upton Sinclair, upwardly mobile, urban renewal, vertical integration, W. E. B. Du Bois, wage slave, War on Poverty, women in the workforce, working poor, Works Progress Administration

While Clinton attempted to make health care expansion a centerpiece of his administration, the same discourse of the deserving and undeserving that inflected the welfare debate also shadowed health care reform. While in European countries health care was described as a human right, in the United States in the 1990s economists focused mainly on the high cost of health care. They even wrote about the “moral hazard” posed by people who used too much health care because their contribution, in the form of deductibles and copayments, was too small to deter use. Responding to both of these issues, the Clinton plan sought to slow the growth of health-care expenses through the use of managed care plans (HMOs) and to expand the risk pool by compelling healthier people to become insured.


pages: 299 words: 91,839

What Would Google Do? by Jeff Jarvis

"World Economic Forum" Davos, 23andMe, Amazon Mechanical Turk, Amazon Web Services, Anne Wojcicki, AOL-Time Warner, barriers to entry, Berlin Wall, bike sharing, business process, call centre, carbon tax, cashless society, citizen journalism, clean water, commoditize, connected car, content marketing, credit crunch, crowdsourcing, death of newspapers, different worldview, disintermediation, diversified portfolio, don't be evil, Dunbar number, fake news, fear of failure, Firefox, future of journalism, G4S, Golden age of television, Google Earth, Googley, Howard Rheingold, informal economy, inventory management, Jeff Bezos, jimmy wales, John Perry Barlow, Kevin Kelly, Marc Benioff, Mark Zuckerberg, moral hazard, Network effects, new economy, Nicholas Carr, old-boy network, PageRank, peer-to-peer lending, post scarcity, prediction markets, pre–internet, Ronald Coase, Salesforce, search inside the book, Sheryl Sandberg, Silicon Valley, Skype, social graph, social software, social web, spectrum auction, speech recognition, Steve Jobs, the long tail, the medium is the message, The Nature of the Firm, the payments system, The Wisdom of Crowds, transaction costs, web of trust, WikiLeaks, Y Combinator, Zipcar

By treating insurance as any other betting market, we’d effectively be insured by many small stakeholders. Cleverer yet, the marketplace could take a cut of premiums in some markets (say 5 per cent?) and use this to audit a random percentage of claims, for particularly risk-averse insurers, or for markets particularly sensitive to moral hazard. Ball said his insurance marketplace would use technology and the theory of social networks to rely on transparency more than trust. He concluded: “Health insurance would certainly take some thought. But then again, I’m in the U.K., so not a problem for me.” Rub it in, why don’t you, James?


pages: 310 words: 90,817

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown by Detlev S. Schlichter

bank run, banks create money, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, currency peg, fixed income, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Kickstarter, Long Term Capital Management, low interest rates, market clearing, Martin Wolf, means of production, Money creation, money market fund, moral hazard, mortgage debt, open economy, Ponzi scheme, price discovery process, price mechanism, price stability, pushing on a string, quantitative easing, reserve currency, rising living standards, risk tolerance, savings glut, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, We are all Keynesians now, Y2K

However, no specific policies are necessary, such as shrinking the money supply or lowering prices to return to a specific price average or a previous gold price. All that is needed is simply a complete stop to money injections followed by the abstention from any interference with the market process. Another misconception is that opposition to interventionist policies after a crisis must be based on considerations of moral hazard. According to this idea, interventions are bad because they allow those who made errors during the boom to escape the full consequences of their mistakes. State intervention always socializes the cost of business failure and thus encourages more reckless risk taking in the future, which will lead to more crises.


pages: 322 words: 87,181

Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik

3D printing, airline deregulation, Asian financial crisis, bank run, barriers to entry, behavioural economics, Berlin Wall, Bernie Sanders, blue-collar work, Bretton Woods, BRICs, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, carried interest, central bank independence, centre right, collective bargaining, conceptual framework, continuous integration, corporate governance, corporate social responsibility, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Donald Trump, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, export processing zone, failed state, financial deregulation, financial innovation, financial intermediation, financial repression, floating exchange rates, full employment, future of work, general purpose technology, George Akerlof, global value chain, income inequality, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Jean Tirole, Kenneth Rogoff, low interest rates, low skilled workers, manufacturing employment, market clearing, market fundamentalism, meta-analysis, moral hazard, Nelson Mandela, new economy, offshore financial centre, open borders, open economy, open immigration, Pareto efficiency, postindustrial economy, precautionary principle, price stability, public intellectual, pushing on a string, race to the bottom, randomized controlled trial, regulatory arbitrage, rent control, rent-seeking, Richard Thaler, Robert Gordon, Robert Shiller, Ronald Reagan, Sam Peltzman, Silicon Valley, Solyndra, special economic zone, spectrum auction, Steven Pinker, tacit knowledge, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, total factor productivity, trade liberalization, transaction costs, Tyler Cowen, unorthodox policies, Washington Consensus, World Values Survey, zero-sum game, éminence grise

One theory, perhaps held most strongly by conservative economists, rejected the Keynesian perspective and re‐enshrined the “self‐equilibrating market” at the center stage of policy. In this worldview, the apparent malfunctions of markets—the boom and bust cycles in finance and macroeconomics, inequality, and low growth—were the product not of market failures but of too much government intervention to begin with. Do away with moral hazard in financial markets, institutionalized labor markets, countercyclical fiscal policy, high taxes, and the welfare state, and all these problems would disappear. This free-market nirvana had little use for economic governance at any level—national or European. The single market and currency would force governments into their proper role—which was to do very little.


pages: 309 words: 91,581

The Great Divergence: America's Growing Inequality Crisis and What We Can Do About It by Timothy Noah

air traffic controllers' union, Alan Greenspan, assortative mating, autonomous vehicles, Bear Stearns, blue-collar work, Bonfire of the Vanities, Branko Milanovic, business cycle, call centre, carbon tax, collective bargaining, compensation consultant, computer age, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, Deng Xiaoping, easy for humans, difficult for computers, Erik Brynjolfsson, Everybody Ought to Be Rich, feminist movement, Ford Model T, Frank Levy and Richard Murnane: The New Division of Labor, Gini coefficient, government statistician, Gunnar Myrdal, income inequality, independent contractor, industrial robot, invisible hand, It's morning again in America, job automation, Joseph Schumpeter, longitudinal study, low skilled workers, lump of labour, manufacturing employment, moral hazard, oil shock, pattern recognition, Paul Samuelson, performance metric, positional goods, post-industrial society, postindustrial economy, proprietary trading, purchasing power parity, refrigerator car, rent control, Richard Feynman, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, Stephen Hawking, Steve Jobs, subprime mortgage crisis, The Spirit Level, too big to fail, trickle-down economics, Tyler Cowen, Tyler Cowen: Great Stagnation, union organizing, upwardly mobile, very high income, Vilfredo Pareto, War on Poverty, We are the 99%, women in the workforce, Works Progress Administration, Yom Kippur War

“If they’re too big to fail, they’re too big,” Greenspan said in a 2009 speech. “In 1911, we broke up Standard Oil. So what happened? The individual parts became more valuable than the whole. Maybe that’s what we need.”11 If the too-big-to-fail banks are allowed to remain as large as they are now, they will continue to pose what bankers call a “moral hazard,” a market distortion in which decisions are made with no consideration of risk because the decision-makers themselves are protected from any possible downside. “Despite the widespread assumption in both New York and Washington that big banks provide societal benefits,” Simon Johnson and James Kwak wrote in 13 Bankers, “there is no proof that these benefits exist and no quantification of their size—certainly no quantification sufficient to show that they outweigh the very obvious costs of having banks that are too big to fail.”


pages: 408 words: 94,311

The Great Depression: A Diary by Benjamin Roth, James Ledbetter, Daniel B. Roth

bank run, banking crisis, book value, business cycle, buy and hold, California gold rush, classic study, collective bargaining, currency manipulation / currency intervention, deindustrialization, financial independence, Joseph Schumpeter, low interest rates, market fundamentalism, military-industrial complex, moral hazard, short selling, statistical model, strikebreaker, union organizing, urban renewal, Works Progress Administration

The diary forces us to confront that buried, throbbing sensation that tells us that no matter how prosperous or lucky or cunning the American economy has been for the past century, we still don’t have definitive, universal answers to some very fundamental economic questions, large and small, that almost obsessed Roth. How much debt is too much debt—for a household, a company, or a government? What is the most secure way to guarantee return on an investment without exposure to excessive risk (whatever excessive risk is)? How much can government prop up private enterprise without creating a moral hazard that hinders market dynamism? Why can’t economies continue to expand at a steady, manageable pace without lapsing into destructive boom-and-bust cycles? It is humbling and a little scary to realize that, since Benjamin Roth first began keeping his journal, millions and millions of man-hours have been spent framing, quantifying, and hypothesizing these questions without creating bulletproof answers or even much of a permanent consensus.


pages: 299 words: 92,782

The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by Michael J. Mauboussin

Amazon Mechanical Turk, Atul Gawande, Benoit Mandelbrot, Black Swan, Boeing 747, Checklist Manifesto, Clayton Christensen, cognitive bias, commoditize, Daniel Kahneman / Amos Tversky, David Brooks, deliberate practice, disruptive innovation, Emanuel Derman, fundamental attribution error, Gary Kildall, Gini coefficient, hindsight bias, hiring and firing, income inequality, Innovator's Dilemma, John Bogle, Long Term Capital Management, loss aversion, Menlo Park, mental accounting, moral hazard, Network effects, power law, prisoner's dilemma, random walk, Richard Thaler, risk-adjusted returns, shareholder value, Simon Singh, six sigma, Steven Pinker, transaction costs, winner-take-all economy, zero-sum game, Zipf's Law

Figure 9-2 shows this pattern of small gains punctuated by a substantial loss. Leaders feel good when the payoffs are positive and have a tendency to extrapolate past success into the future. But, as Taleb emphasizes, it can take a long time for a series of data in the fourth quadrant to reveal its properties. Moral hazard refers to a person or organization taking an action on behalf of others without suffering the consequences if the outcome is bad. Take the case of MF Global, a large financial broker of derivatives. Through 2010 and 2011, the firm's chairman and CEO, Jon Corzine, directed an investment in European sovereign debt that peaked at more than $6 billion.


pages: 345 words: 92,063

Power, for All: How It Really Works and Why It's Everyone's Business by Julie Battilana, Tiziana Casciaro

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, Abraham Maslow, affirmative action, agricultural Revolution, Albert Einstein, algorithmic bias, Andy Rubin, Asperger Syndrome, benefit corporation, Big Tech, BIPOC, Black Lives Matter, blood diamond, Boris Johnson, British Empire, call centre, Cass Sunstein, classic study, clean water, cognitive dissonance, collective bargaining, conceptual framework, coronavirus, COVID-19, CRISPR, deep learning, different worldview, digital rights, disinformation, Elon Musk, Erik Brynjolfsson, fake news, feminist movement, fundamental attribution error, future of work, George Floyd, gig economy, Greta Thunberg, hiring and firing, impact investing, income inequality, informal economy, Intergovernmental Panel on Climate Change (IPCC), invention of movable type, Jeff Bezos, job satisfaction, Joshua Gans and Andrew Leigh, Mahatma Gandhi, means of production, mega-rich, meritocracy, meta-analysis, Milgram experiment, moral hazard, Naomi Klein, Nelson Mandela, Occupy movement, Panopticon Jeremy Bentham, principal–agent problem, profit maximization, Ralph Waldo Emerson, ride hailing / ride sharing, Salesforce, School Strike for Climate, Second Machine Age, shareholder value, sharing economy, Sheryl Sandberg, Shoshana Zuboff, Silicon Valley, social distancing, Social Justice Warrior, Social Responsibility of Business Is to Increase Its Profits, Steven Pinker, surveillance capitalism, tacit knowledge, tech worker, the scientific method, The Wisdom of Crowds, TikTok, Tim Cook: Apple, transatlantic slave trade, union organizing, zero-sum game

Martin’s Press, 2020). 60 Anita Williams Woolley et al., “Evidence for a Collective Intelligence Factor in the Performance of Human Groups,” Science 330, no. 6004 (2010): 686–8. 61 Marko Pitesa and Stefan Thau, “Masters of the Universe: How Power and Accountability Influence Self-Serving Decisions under Moral Hazard,” Journal of Applied Psychology 98, no. 3 (2013): 550–8. 62 Amy Edmondson, “The Competitive Imperative of Learning,” Harvard Business Review 86, no. 7–8 (2008): 60. 3. WHAT DO PEOPLE VALUE? 1 For a comparison and summary of essential views of human nature in Western and Eastern thought, including Confucianism, Hinduism, Buddhism, Plato, the Bible, Islam, and Kant, see Leslie Forster Stevenson, Thirteen Theories of Human Nature (Oxford: Oxford University Press, 2018). 2 Mihaly Csikszentmihalyi, Flow: The Psychology of Optimal Experience (New York: Harper, 2008), 8. 3 Johannes Gerschewski, “The Three Pillars of Stability: Legitimation, Repression, and Co-Optation in Autocratic Regimes,” Democratization 20, no. 1 (2013): 13–38. 4 Diego Gambetta, The Sicilian Mafia: The Business of Private Protection (Cambridge, MA: Harvard University Press, 1996). 5 United Nations Office on Drugs and Crime, “Global Study on Homicide 2018: Gender-Related Killing of Women and Girls,” 2018; Jan Stets, Domestic Violence and Control (New York: Springer-Verlag, 1988). 6 Margaret W.


pages: 326 words: 88,968

The Science and Technology of Growing Young: An Insider's Guide to the Breakthroughs That Will Dramatically Extend Our Lifespan . . . And What You Can Do Right Now by Sergey Young

23andMe, 3D printing, Albert Einstein, artificial general intelligence, augmented reality, basic income, Big Tech, bioinformatics, Biosphere 2, brain emulation, caloric restriction, caloric restriction, Charles Lindbergh, classic study, clean water, cloud computing, cognitive bias, computer vision, coronavirus, COVID-19, CRISPR, deep learning, digital twin, diversified portfolio, Doomsday Clock, double helix, Easter island, Elon Musk, en.wikipedia.org, epigenetics, European colonialism, game design, Gavin Belson, George Floyd, global pandemic, hockey-stick growth, impulse control, Internet of things, late capitalism, Law of Accelerating Returns, life extension, lockdown, Lyft, Mark Zuckerberg, meta-analysis, microbiome, microdosing, moral hazard, mouse model, natural language processing, personalized medicine, plant based meat, precision agriculture, radical life extension, Ralph Waldo Emerson, Ray Kurzweil, Richard Feynman, ride hailing / ride sharing, Ronald Reagan, self-driving car, seminal paper, Silicon Valley, stem cell, Steve Jobs, tech billionaire, TED Talk, uber lyft, ultra-processed food, universal basic income, Virgin Galactic, Vision Fund, X Prize

Collectively, we can draw and redraw the red lines that define what is good and what is beyond the pale.”39 GROWING OLDER—AND WISER In the introduction to this chapter, I promised you that we can defeat aging, and I asked, Should we? My answer is, We should. But I’ll get back to that in a minute. Look—the environmental and moral hazards we face are daunting. Most humans act pretty selfishly and irresponsibly. It’s part of another cognitive bias called hyperbolic discounting. That’s the tendency of people to value a smaller, near-term reward over a larger, longer-term benefit. We chase after short-term gain as if we were mice on a wheel, frantically seeking to get ahead while not even caring about where we are truly going.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, behavioural economics, Bernie Madoff, Black Swan, Bob Litterman, bond market vigilante , book value, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, carbon credits, Carmen Reinhart, central bank independence, classic study, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global macro, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, inverted yield curve, invisible hand, John Bogle, junk bonds, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, pension time bomb, performance metric, Phillips curve, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, savings glut, search costs, selection bias, seminal paper, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stock buybacks, stocks for the long run, survivorship bias, systematic trading, tail risk, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

For example, high levels of disagreement and short-selling constraints together predict relatively low equity returns because overvalued stocks cannot be shorted and tend to be held by the most optimistic investors. Asymmetric information refers to situations in which one party is better informed than the other, leading to so-called principal–agent problems (including moral hazard, adverse selection, conflict of interest). Vayanos–Woolley (2010) show that delegated asset management can cause momentum patterns. As investors (principals) try to learn about a manager’s (agent’s) skill from his past performance and effectively chase returns, the resulting fund flows push prices away from fair values, inducing short-term momentum and long-term reversal patterns. 5.3 DETOUR: A BRIEF SURVEY OF THE EFFICIENT MARKETS HYPOTHESIS Before turning to behavioral finance, it is appropriate to briefly survey the efficient markets hypothesis (EMH).

According to the “debt supercycle” theme of the Bank Credit Analyst, the borrow-and-spend process has been a means to sustain politically desirable economic growth. In the background lurked policymakers’ fear of another Great Depression, but by keeping deflationary risks contained they created new types of imbalances: ever escalating leverage punctuated by occasional crises, and bailouts that encouraged ever greater risk taking and moral hazard. We may be in the final innings of this supercycle since 2008: the private sector no longer keeps borrowing while the public sector levers up to sustain economic growth. Eventually, stretched public finances will threaten public-sector credibility to the extent that such reflation policy will not be able to continue.


pages: 339 words: 95,988

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt, Stephen J. Dubner

airport security, Alan Greenspan, behavioural economics, Broken windows theory, crack epidemic, desegregation, Exxon Valdez, feminist movement, George Akerlof, information asymmetry, Joseph Schumpeter, Kenneth Arrow, longitudinal study, mental accounting, moral hazard, More Guns, Less Crime, oil shale / tar sands, Paul Samuelson, peak oil, pets.com, profit maximization, Richard Thaler, school choice, sensible shoes, Steven Pinker, Ted Kaczynski, The Chicago School, The Market for Lemons, Thorstein Veblen, Tragedy of the Commons, twin studies, War on Poverty

Levitt and Chad Syverson, “Market Distortions When Agents Are Better Informed: A Theoretical and Empirical Exploration of the Value of Information in Real Estate Transactions,” National Bureau of Economic Research working paper, 2005. /5–6 The lax California auto mechanics are discussed in Thomas Hubbard, “An Empirical Examination of Moral Hazard in the Vehicle Inspection Market,” RAND Journal of Economics 29, no. 1 (1998), pp. 406–26; and in Thomas Hubbard, “How Do Consumers Motivate Experts? Reputational Incentives in an Auto Repair Market,” Journal of Law & Economics 45, no. 2 (2002), pp. 437–68. / 6 Doctors who perform extra C-sections are examined in Jonathan Gruber and Maria Owings, “Physician Financial Incentives and Caesarean Section Delivery,” RAND Journal of Economics 27, no. 1 (1996), pp. 99–123.


The Despot's Accomplice: How the West Is Aiding and Abetting the Decline of Democracy by Brian Klaas

Asian financial crisis, Ayatollah Khomeini, Berlin Wall, Boris Johnson, citizen journalism, clean water, crowdsourcing, cuban missile crisis, Deng Xiaoping, disinformation, Dissolution of the Soviet Union, Donald Trump, eurozone crisis, failed state, financial independence, Francis Fukuyama: the end of history, friendly fire, global pandemic, Great Leap Forward, moral hazard, Ronald Reagan, selection bias, Seymour Hersh, Skype, Steve Jobs, trade route, Transnistria, Twitter Arab Spring, unemployed young men, Washington Consensus, zero-sum game

Cédras was in a weak bargaining position and he was a legitimately bad guy; the United States should have guaranteed his safety, but forced him to agree to an asset forfeiture and a reasonably long period of house arrest: enough to make him feel punished but not enough to deter him from signing the deal. â•… Then, International Criminal Court prosecutions should still function as a major deterrent, but one reserved for war criminals, perpetrators of genocide, and others whose actions are so abhorrent that no level of utilitarian commitment can absolve the injustice of letting them go unpunished. These are the worst of the worst, and the “moral hazard” of letting them get away with their crimes is far more devastating than any failed transition could be, as it could spark copycats in presidential palaces around the globe. â•… In this vein, Laurent Gbagbo is an interesting case. The civil war that he helped spark resulted in the deaths of 3,000 Ivoirians, but fighters on both sides committed atrocities.


pages: 391 words: 102,301

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

"World Economic Forum" Davos, Alan Greenspan, 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, carbon tax, 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, Glass-Steagall Act, global reserve currency, Global Witness, Golden arches theory, Great Leap Forward, greed is good, Greenspan put, Hernando de Soto, illegal immigration, income inequality, invisible hand, It's morning again in America, Jeff Bezos, laissez-faire capitalism, Live Aid, low interest rates, market fundamentalism, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, moral hazard, mutually assured destruction, Naomi Klein, Nelson Mandela, offshore financial centre, Oklahoma City bombing, open borders, open economy, Peace of Westphalia, peak oil, pension reform, plutocrats, popular capitalism, price stability, RAND corporation, reserve currency, rising living standards, road to serfdom, Ronald Reagan, Savings and loan crisis, shareholder value, Sinatra Doctrine, sovereign wealth fund, special economic zone, Steve Jobs, Stewart Brand, Tax Reform Act of 1986, The Chicago School, The Great Moderation, The Myth of the Rational Market, Thomas Malthus, Timothy McVeigh, trickle-down economics, Washington Consensus, Winter of Discontent, zero-sum game

It was left to a few academic critics to argue that rescuing Wall Street investment banks from the consequences of their bad investment decisions was creating a very bad precedent and storing up trouble for the future.29 But, as was to become even more evident in 2008, abstract considerations of “moral hazard” in investment banking counted little compared to the apparent threat of a meltdown of the global financial system. More important, global finance was a vital part of globalization, easing the passage of capital around the world. And in the Age of Optimism, the promoters of globalization felt that the moral arguments were overwhelmingly on their side.


pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

Alan Greenspan, Andrei Shleifer, Asian financial crisis, bank run, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, blockchain, Boris Johnson, Bretton Woods, business cycle, capital controls, Carmen Reinhart, cashless society, central bank independence, cryptocurrency, debt deflation, disruptive innovation, distributed ledger, Dr. Strangelove, Edward Snowden, Ethereum, ethereum blockchain, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial exclusion, financial intermediation, financial repression, forward guidance, frictionless, full employment, George Akerlof, German hyperinflation, government statistician, illegal immigration, inflation targeting, informal economy, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, low interest rates, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, moveable type in China, New Economic Geography, offshore financial centre, oil shock, open economy, payday loans, price stability, purchasing power parity, quantitative easing, RAND corporation, RFID, savings glut, secular stagnation, seigniorage, The Great Moderation, the payments system, The Rise and Fall of American Growth, transaction costs, unbanked and underbanked, unconventional monetary instruments, underbanked, unorthodox policies, Y2K, yield curve

In the extreme case, the government could adopt a version of the 1930s “Chicago plan,” which would essentially allow banks to issue money-like instruments only if they were 100% backed by government debt, which presumably can include central bank reserves.10 The name relates to Chicago economists Henry Simon, Frank Knight, Milton Friedman, and Irving Fisher (the last actually a Yale professor), who advocated the idea of “narrow banking” to mitigate moral hazard problems and eliminate bank runs (assuming that the government itself is fully solvent). A Chicago-type plan would mark a quantum change in the financial system and would radically reroute the way capital flows in the economy. By expanding the scope of the government’s monopoly on all retail transaction media, the government would be able to raise vast amounts of capital, essentially usurping one of the private banking system’s main funding mechanisms.


pages: 313 words: 101,403

My Life as a Quant: Reflections on Physics and Finance by Emanuel Derman

Bear Stearns, Berlin Wall, bioinformatics, Black-Scholes formula, book value, Brownian motion, buy and hold, capital asset pricing model, Claude Shannon: information theory, Dennis Ritchie, Donald Knuth, Emanuel Derman, financial engineering, fixed income, Gödel, Escher, Bach, haute couture, hiring and firing, implied volatility, interest rate derivative, Jeff Bezos, John Meriwether, John von Neumann, Ken Thompson, law of one price, linked data, Long Term Capital Management, moral hazard, Murray Gell-Mann, Myron Scholes, PalmPilot, Paul Samuelson, pre–internet, proprietary trading, publish or perish, quantitative trading / quantitative finance, Sharpe ratio, statistical arbitrage, statistical model, Stephen Hawking, Steve Jobs, stochastic volatility, technology bubble, the new new thing, transaction costs, volatility smile, Y2K, yield curve, zero-coupon bond, zero-sum game

This was an immensely significant and practical question, because the value of these securities determines the company's earnings, its stock price, and the bonuses of the traders that manage them. The trading desks typically valued their illiquid positions using their own models. But this involved a moral hazard; when a trader's year-end bonus depends upon the value of a security whose price is both obscure and under his control, he may be tempted to embellish his profit when payday approaches. The Derivatives Analysis group was the firm's model police: Our job was to confirm that the billions of dollars of exotic or illiquid derivatives were being marked fairly.


pages: 317 words: 106,130

The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Thomas Schneeweis, Garry B. Crowder, Hossein Kazemi

asset allocation, backtesting, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, book value, business cycle, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, financial engineering, fixed income, global macro, high net worth, implied volatility, index fund, interest rate swap, invisible hand, managed futures, market microstructure, merger arbitrage, moral hazard, Myron Scholes, passive investing, Richard Feynman, Richard Feynman: Challenger O-ring, risk free rate, risk tolerance, risk-adjusted returns, risk/return, search costs, selection bias, Sharpe ratio, short selling, statistical model, stocks for the long run, survivorship bias, systematic trading, technology bubble, the market place, Thomas Kuhn: the structure of scientific revolutions, transaction costs, value at risk, yield curve, zero-sum game

Once you move beyond the obvious fact that there is a manifold difference between decision making where there is no risk and decision making where reputations and significant pools of money are at stake, there is the question of whether the indices or investment proxies actually reflect realistic investable returns or values. This chapter deals with the latter issue and leaves the moral hazards to the regulators and an investor’s common sense. One of the principal concerns in the application of multi-asset management is the degree to which the potential advantages shown in the asset allocation designed portfolio can be transferred to the investor. Where the design is based on investment benchmarks, the question is whether the benchmarks are investable in some meaningful manner or whether there is a suitable proxy.


Falter: Has the Human Game Begun to Play Itself Out? by Bill McKibben

"Hurricane Katrina" Superdome, 23andMe, Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, American Legislative Exchange Council, An Inconvenient Truth, Anne Wojcicki, Anthropocene, Apollo 11, artificial general intelligence, Bernie Sanders, Bill Joy: nanobots, biodiversity loss, Burning Man, call centre, Cambridge Analytica, carbon footprint, carbon tax, Charles Lindbergh, clean water, Colonization of Mars, computer vision, CRISPR, David Attenborough, deep learning, DeepMind, degrowth, disinformation, Donald Trump, double helix, driverless car, Easter island, Edward Snowden, Elon Musk, ending welfare as we know it, energy transition, Extinction Rebellion, Flynn Effect, gigafactory, Google Earth, Great Leap Forward, green new deal, Greta Thunberg, Hyperloop, impulse control, income inequality, Intergovernmental Panel on Climate Change (IPCC), James Bridle, Jane Jacobs, Jaron Lanier, Jeff Bezos, job automation, Kim Stanley Robinson, life extension, light touch regulation, Mark Zuckerberg, mass immigration, megacity, Menlo Park, moral hazard, Naomi Klein, Neil Armstrong, Nelson Mandela, Nick Bostrom, obamacare, ocean acidification, off grid, oil shale / tar sands, paperclip maximiser, Paris climate accords, pattern recognition, Peter Thiel, plutocrats, profit motive, Ralph Waldo Emerson, Ray Kurzweil, Robert Mercer, Ronald Reagan, Sam Altman, San Francisco homelessness, self-driving car, Silicon Valley, Silicon Valley startup, smart meter, Snapchat, stem cell, Stephen Hawking, Steve Jobs, Steve Wozniak, Steven Pinker, strong AI, supervolcano, tech baron, tech billionaire, technoutopianism, TED Talk, The Wealth of Nations by Adam Smith, traffic fines, Tragedy of the Commons, Travis Kalanick, Tyler Cowen, urban sprawl, Virgin Galactic, Watson beat the top human players on Jeopardy!, Y Combinator, Y2K, yield curve

And the multibillion-dollar attempts at building a “biosphere” here on our home planet (where building supplies arrived on a truck) ended in abject failure. Kim Stanley Robinson wrote the greatest novels about the colonization of Mars, a trilogy that dates back a quarter century. Now, says their author, he thinks the whole thing would be a mistake. “It creates a moral hazard,” he says. People imagine that if we mess up the Earth, we can “always go to Mars or the stars. It’s pernicious.”9 In fact, it’s worse than that. It distracts us from the almost unbearable beauty of the planet we already inhabit. In a more recent novel, Aurora, Robinson describes a failed mission from Earth to colonize a planet (failed for all the reasons of distance and human frailty I’ve already described).


pages: 369 words: 98,776

The God Species: Saving the Planet in the Age of Humans by Mark Lynas

Airbus A320, Anthropocene, back-to-the-land, Berlin Wall, biodiversity loss, carbon credits, carbon footprint, clean water, Climategate, Climatic Research Unit, data science, David Ricardo: comparative advantage, decarbonisation, degrowth, dematerialisation, demographic transition, Easter island, Eyjafjallajökull, Great Leap Forward, Haber-Bosch Process, ice-free Arctic, Intergovernmental Panel on Climate Change (IPCC), invention of the steam engine, James Watt: steam engine, megacity, meta-analysis, moral hazard, Negawatt, New Urbanism, ocean acidification, oil shale / tar sands, out of africa, peak oil, planetary scale, precautionary principle, quantitative easing, race to the bottom, rewilding, Ronald Reagan, special drawing rights, Stewart Brand, synthetic biology, Tragedy of the Commons, two and twenty, undersea cable, University of East Anglia, We are as Gods

The injection of aerosols into the stratosphere would likely reduce the strength of the African and Asian summer monsoons, potentially affecting water and food supplies for two billion people.44 The 1991 Pinatubo eruption led to dramatically reduced rainfall and runoff throughout the subtropics the following year. “The central concern with geoengineering fixes to global warming is that the cure could be worse than the disease,” warned climatologists Kevin Trenberth and Aiguo Dai following Crutzen’s essay.45 There is also the danger of “moral hazard.” This is the idea that if a technological fix for global warming were made available, then governments would avoid the more difficult challenge of reducing greenhouse gas emissions. “It’s like a junkie figuring out new ways of stealing from his children,” was the angry response of Meinrat Andreae, an atmospheric scientist at the Max Planck Institute in Germany.46 The problem with these very legitimate objections—and there are many more too numerous to list here47—is that they fail to address the central conundrum identified by Crutzen: that by removing the aerosol pollution sunshade that currently reduces global warming by 50 percent or more, humanity will expose itself and the planet to the full glare of the sun and consequent soaring temperatures.48 Keeping our cities smoggy is not an option, for the reasons already outlined.


pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, business cycle, buy and hold, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, Future Shock, George Akerlof, George Santayana, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, junk bonds, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Michael Milken, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Paul Samuelson, Phillips curve, plutocrats, Post-Keynesian economics, price stability, profit maximization, public intellectual, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, seminal paper, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, W. E. B. Du Bois, We are all Keynesians now, working-age population, Y2K, Yom Kippur War

Firms often level wages, paying the same wage to everyone with the same job description even if some workers are manifestly more productive than others. This would seem to defy economic logic. Why not reward the more productive employees? But many firms strictly adhere to a level-wage policy. They do not give higher pay to the more productive workers not only because of a sense that doing so would be unfair, but also because of a perceived “morale hazard”: a potential loss of confidence among the lower-paid workers, disrupting their self-esteem and thus their commitment to their employer (Fang and Moscarini 2002). 8. Akerlof et al. (1996, p. 31). 9. Such a value for wage truncation between zero and 2% is in rough agreement with calculations of wage truncation taken from the asymmetry of the wagechange distribution by Card and Hyslop (1997).


pages: 414 words: 101,285

The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do About It by Ian Goldin, Mike Mariathasan

air freight, air traffic controllers' union, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, behavioural economics, Berlin Wall, biodiversity loss, Bretton Woods, BRICs, business cycle, butterfly effect, carbon tax, clean water, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, connected car, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, digital divide, discovery of penicillin, diversification, diversified portfolio, Douglas Engelbart, Douglas Engelbart, Edward Lorenz: Chaos theory, energy security, eurozone crisis, Eyjafjallajökull, failed state, Fairchild Semiconductor, Fellow of the Royal Society, financial deregulation, financial innovation, financial intermediation, fixed income, Gini coefficient, Glass-Steagall Act, global pandemic, global supply chain, global value chain, global village, high-speed rail, income inequality, information asymmetry, Jean Tirole, John Snow's cholera map, Kenneth Rogoff, light touch regulation, Long Term Capital Management, market bubble, mass immigration, megacity, moral hazard, Occupy movement, offshore financial centre, open economy, precautionary principle, profit maximization, purchasing power parity, race to the bottom, RAND corporation, regulatory arbitrage, reshoring, risk free rate, Robert Solow, scientific management, Silicon Valley, six sigma, social contagion, social distancing, Stuxnet, supply-chain management, systems thinking, tail risk, TED Talk, The Great Moderation, too big to fail, Toyota Production System, trade liberalization, Tragedy of the Commons, transaction costs, uranium enrichment, vertical integration

The share of the top three banks increased from 10 percent in 1990 to about 40 percent in 2008 in the United States and from about 50 percent in 1997 to almost 80 percent in 2008 in the United Kingdom.20 Such significant increases in market concentration lead to implicit bailout guarantees by the state in the event of insolvency. These guarantees, as the 2007/2008 crisis shows, can quickly turn into explicit guarantees that erode market discipline and encourage the largest banks to take on excessive risks, safe in the knowledge that they will be rescued if something should go wrong. Moral hazard thus fuels systemic risk and, as we can see with hindsight, is a significant source of financial instability. Concentration as a source of systemic risk is not found just in the financial system, however. A number of studies show how concentration in commodity networks also enables firms to exert control over suppliers, “making them captives.”21 The increasingly complex financial network expanded not only in terms of size but also in terms of sophistication.


pages: 388 words: 99,023

The Emperor's New Road: How China's New Silk Road Is Remaking the World by Jonathan Hillman

"World Economic Forum" Davos, British Empire, cable laying ship, capital controls, colonial rule, coronavirus, COVID-19, Deng Xiaoping, Donald Trump, drone strike, energy security, facts on the ground, high-speed rail, intermodal, joint-stock company, Just-in-time delivery, land reform, low interest rates, M-Pesa, Malacca Straits, megaproject, moral hazard, offshore financial centre, rent-seeking, Scramble for Africa, Silicon Valley, smart cities, South China Sea, special economic zone, Suez canal 1869, Suez crisis 1956, supply-chain management, trade route, transcontinental railway, undersea cable, union organizing, Washington Consensus

The prospect of turning around a failing project is tempting, and if it works, India could play the hero, rescuing its southern neighbor from a Chinese-built boondoggle. But if it fails, India risks assuming some of the reputational damage that China would otherwise suffer. India’s bailout might also contribute to a sort of moral hazard, providing future Sri Lankan officials with a false sense of security to pursue more risky projects. Rather than India playing China’s game and having its reputation dragged into the mud, it might be better served by focusing on economic fundamentals. For China, Sri Lanka’s 2015 election was a leading indicator of trouble to come.


pages: 349 words: 99,230

Essential: How the Pandemic Transformed the Long Fight for Worker Justice by Jamie K. McCallum

Affordable Care Act / Obamacare, American Legislative Exchange Council, Anthropocene, antiwork, Bear Stearns, Bernie Sanders, Black Lives Matter, carbon tax, cognitive dissonance, collective bargaining, company town, coronavirus, COVID-19, death from overwork, defund the police, deindustrialization, deskilling, Donald Trump, Elon Musk, future of work, George Floyd, gig economy, global pandemic, global supply chain, Great Leap Forward, green new deal, housing crisis, income inequality, independent contractor, invisible hand, Jeff Bezos, job automation, karōshi / gwarosa / guolaosi, labor-force participation, laissez-faire capitalism, lockdown, Loma Prieta earthquake, low-wage service sector, Lyft, manufacturing employment, market fundamentalism, minimum wage unemployment, moral hazard, Naomi Klein, occupational segregation, post-work, QR code, race to the bottom, remote working, rewilding, ride hailing / ride sharing, side hustle, single-payer health, social distancing, stock buybacks, strikebreaker, subprime mortgage crisis, TaskRabbit, The Great Resignation, the strength of weak ties, trade route, Triangle Shirtwaist Factory, Uber and Lyft, uber lyft, union organizing, Upton Sinclair, women in the workforce, working poor, workplace surveillance , Works Progress Administration, zoonotic diseases

If we could have designed the pandemic to wreak the most havoc, launching it in 2019 makes perfect sense. In context, we can see it as a discrete part of a converging general breakdown of the Anthropocene—the inability to sustain human life. The prism through which you view this crisis depends on your perspective. Philosophers might pay most attention to the abundant moral hazards. Perhaps political scientists see first and foremost the indefensible abuses of power and necropolitical neglect for human life of the Trump administration. Psychologists examine our brains under lockdown. The wealthy see an opportunity. As a sociologist who focuses primarily on labor issues, I saw class war.


pages: 289 words: 95,046

Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis by Scott Patterson

"World Economic Forum" Davos, 2021 United States Capitol attack, 4chan, Alan Greenspan, Albert Einstein, asset allocation, backtesting, Bear Stearns, beat the dealer, behavioural economics, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, bitcoin, Bitcoin "FTX", Black Lives Matter, Black Monday: stock market crash in 1987, Black Swan, Black Swan Protection Protocol, Black-Scholes formula, blockchain, Bob Litterman, Boris Johnson, Brownian motion, butterfly effect, carbon footprint, carbon tax, Carl Icahn, centre right, clean tech, clean water, collapse of Lehman Brothers, Colonization of Mars, commodity super cycle, complexity theory, contact tracing, coronavirus, correlation does not imply causation, COVID-19, Credit Default Swap, cryptocurrency, Daniel Kahneman / Amos Tversky, decarbonisation, disinformation, diversification, Donald Trump, Doomsday Clock, Edward Lloyd's coffeehouse, effective altruism, Elliott wave, Elon Musk, energy transition, Eugene Fama: efficient market hypothesis, Extinction Rebellion, fear index, financial engineering, fixed income, Flash crash, Gail Bradbrook, George Floyd, global pandemic, global supply chain, Gordon Gekko, Greenspan put, Greta Thunberg, hindsight bias, index fund, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Jeff Bezos, Jeffrey Epstein, Joan Didion, John von Neumann, junk bonds, Just-in-time delivery, lockdown, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, Mark Spitznagel, Mark Zuckerberg, market fundamentalism, mass immigration, megacity, Mikhail Gorbachev, Mohammed Bouazizi, money market fund, moral hazard, Murray Gell-Mann, Nick Bostrom, off-the-grid, panic early, Pershing Square Capital Management, Peter Singer: altruism, Ponzi scheme, power law, precautionary principle, prediction markets, proprietary trading, public intellectual, QAnon, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Nader, Ralph Nelson Elliott, random walk, Renaissance Technologies, rewilding, Richard Thaler, risk/return, road to serfdom, Ronald Reagan, Ronald Reagan: Tear down this wall, Rory Sutherland, Rupert Read, Sam Bankman-Fried, Silicon Valley, six sigma, smart contracts, social distancing, sovereign wealth fund, statistical arbitrage, statistical model, stem cell, Stephen Hawking, Steve Jobs, Steven Pinker, Stewart Brand, systematic trading, tail risk, technoutopianism, The Chicago School, The Great Moderation, the scientific method, too big to fail, transaction costs, University of East Anglia, value at risk, Vanguard fund, We are as Gods, Whole Earth Catalog

If the project were halted, there’d be the possibility of sudden shock heating of the planet, causing untold chaos, damage, and death—an effect New Yorker journalist Elizabeth Kolbert described as like “opening a globe-sized oven door” in her 2021 book, Under a White Sky. Another argument against geoengineering is that it creates a stark moral hazard. If it works, there’s the chance that the costly worldwide effort to reduce carbon emissions will lose support. Is it any surprise that former ExxonMobil CEO (and Trump’s first secretary of state) Rex Tillerson thinks geoengineering is a great idea? There are also the unknown side effects, such as acid rain.


pages: 326 words: 106,053

The Wisdom of Crowds by James Surowiecki

Alan Greenspan, AltaVista, Andrei Shleifer, Apollo 13, asset allocation, behavioural economics, Cass Sunstein, classic study, congestion pricing, coronavirus, Daniel Kahneman / Amos Tversky, experimental economics, Frederick Winslow Taylor, George Akerlof, Great Leap Forward, Gregor Mendel, Howard Rheingold, I think there is a world market for maybe five computers, interchangeable parts, Jeff Bezos, John Bogle, John Meriwether, Joseph Schumpeter, knowledge economy, lone genius, Long Term Capital Management, market bubble, market clearing, market design, Monkeys Reject Unequal Pay, moral hazard, Myron Scholes, new economy, offshore financial centre, Picturephone, prediction markets, profit maximization, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, Robert Shiller, Ronald Coase, Ronald Reagan, seminal paper, shareholder value, short selling, Silicon Valley, South Sea Bubble, tacit knowledge, The Nature of the Firm, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Toyota Production System, transaction costs, ultimatum game, vertical integration, world market for maybe five computers, Yogi Berra, zero-sum game

Thomas Schelling, Choice and Consequence (Cambridge: Harvard University Press, 1985): 210. See also Kenneth J. Arrow, “Observations on Social Capital,” in Social Capital: A Multifaceted Perspective, edited by Partha Dasgupta and Ismail Seregeldin (Washington, DC: The World Bank, 1999); and Arrow, “The Economics of Moral Hazard—Further Comment,” American Economic Review 58 (1968): 537–38. The thinker who’s done the most to make it clear how important healthy institutions are to economic growth is the economist Douglass North. See, among many others, Douglass C. North, “Economic Performance Through Time,” American Economic Review 84 (1994): 359–68; and North, “Institutions,” Journal of Economic Perspectives 5 (1991): 97–112.


pages: 406 words: 105,602

The Startup Way: Making Entrepreneurship a Fundamental Discipline of Every Enterprise by Eric Ries

activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, AOL-Time Warner, autonomous vehicles, barriers to entry, basic income, Ben Horowitz, billion-dollar mistake, Black-Scholes formula, Blitzscaling, call centre, centralized clearinghouse, Clayton Christensen, cognitive dissonance, connected car, corporate governance, DevOps, Elon Musk, en.wikipedia.org, fault tolerance, financial engineering, Frederick Winslow Taylor, global supply chain, Great Leap Forward, hockey-stick growth, index card, Jeff Bezos, Kickstarter, Lean Startup, loss aversion, machine readable, Marc Andreessen, Mark Zuckerberg, means of production, minimum viable product, moral hazard, move fast and break things, obamacare, PalmPilot, peer-to-peer, place-making, rent-seeking, Richard Florida, Sam Altman, Sand Hill Road, scientific management, secular stagnation, shareholder value, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, six sigma, skunkworks, Steve Jobs, TechCrunch disrupt, the scientific method, time value of money, Toyota Production System, two-pizza team, Uber for X, universal basic income, web of trust, Y Combinator

In some cultures, a failed startup is not only an embarrassing episode in one’s early adult life (as it was for me), but a professional death sentence that makes it impossible to find gainful employment in the future. As a result, anything that cushions people from the consequences of business failure will pay dramatic dividends in terms of the rate of entrepreneurship. Such cushioning is not easy to accomplish without creating moral hazard, however, as many critics of government programs have pointed out over the years. We have to be smart about it. For a public policy to be considered truly pro-entrepreneurship, it has to affect at least one of the three sets of factors I just described. To convince people to try entrepreneurship, we have to affect their lives before they’re at the moment of making the choice, or the choice doesn’t truly exist.


pages: 416 words: 106,532

Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond: The Innovative Investor's Guide to Bitcoin and Beyond by Chris Burniske, Jack Tatar

Airbnb, Alan Greenspan, altcoin, Alvin Toffler, asset allocation, asset-backed security, autonomous vehicles, Bear Stearns, bitcoin, Bitcoin Ponzi scheme, blockchain, Blythe Masters, book value, business cycle, business process, buy and hold, capital controls, carbon tax, Carmen Reinhart, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, correlation coefficient, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, disintermediation, distributed ledger, diversification, diversified portfolio, Dogecoin, Donald Trump, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, fiat currency, financial engineering, financial innovation, fixed income, Future Shock, general purpose technology, George Gilder, Google Hangouts, high net worth, hype cycle, information security, initial coin offering, it's over 9,000, Jeff Bezos, Kenneth Rogoff, Kickstarter, Leonard Kleinrock, litecoin, low interest rates, Marc Andreessen, Mark Zuckerberg, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, packet switching, passive investing, peer-to-peer, peer-to-peer lending, Peter Thiel, pets.com, Ponzi scheme, prediction markets, quantitative easing, quantum cryptography, RAND corporation, random walk, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ross Ulbricht, Salesforce, Satoshi Nakamoto, seminal paper, Sharpe ratio, Silicon Valley, Simon Singh, Skype, smart contracts, social web, South Sea Bubble, Steve Jobs, transaction costs, tulip mania, Turing complete, two and twenty, Uber for X, Vanguard fund, Vitalik Buterin, WikiLeaks, Y2K

Since no money in The DAO was ever spent, nothing was lost.”28 However, a hard fork would run counter to what many in the Bitcoin and Ethereum communities felt was the power of a decentralized ledger. Forcefully removing funds from an account violated the concept of immutability. This was exacerbated by the fact that a centralized set of players was making the decision. Many complained of moral hazard, and that this would set a precedent for the U.S. government or other powerful entities to come in someday and demand the same of Ethereum for their own interests. It was a tough decision for all involved, including Buterin, who while not directly on The DAO developer team, was an administrator.


pages: 484 words: 104,873

Rise of the Robots: Technology and the Threat of a Jobless Future by Martin Ford

3D printing, additive manufacturing, Affordable Care Act / Obamacare, AI winter, algorithmic management, algorithmic trading, Amazon Mechanical Turk, artificial general intelligence, assortative mating, autonomous vehicles, banking crisis, basic income, Baxter: Rethink Robotics, Bernie Madoff, Bill Joy: nanobots, bond market vigilante , business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Charles Babbage, Chris Urmson, Clayton Christensen, clean water, cloud computing, collateralized debt obligation, commoditize, computer age, creative destruction, data science, debt deflation, deep learning, deskilling, digital divide, disruptive innovation, diversified portfolio, driverless car, Erik Brynjolfsson, factory automation, financial innovation, Flash crash, Ford Model T, Fractional reserve banking, Freestyle chess, full employment, general purpose technology, Geoffrey Hinton, Goldman Sachs: Vampire Squid, Gunnar Myrdal, High speed trading, income inequality, indoor plumbing, industrial robot, informal economy, iterative process, Jaron Lanier, job automation, John Markoff, John Maynard Keynes: technological unemployment, John von Neumann, Kenneth Arrow, Khan Academy, Kiva Systems, knowledge worker, labor-force participation, large language model, liquidity trap, low interest rates, low skilled workers, low-wage service sector, Lyft, machine readable, machine translation, manufacturing employment, Marc Andreessen, McJob, moral hazard, Narrative Science, Network effects, new economy, Nicholas Carr, Norbert Wiener, obamacare, optical character recognition, passive income, Paul Samuelson, performance metric, Peter Thiel, plutocrats, post scarcity, precision agriculture, price mechanism, public intellectual, Ray Kurzweil, rent control, rent-seeking, reshoring, RFID, Richard Feynman, Robert Solow, Rodney Brooks, Salesforce, Sam Peltzman, secular stagnation, self-driving car, Silicon Valley, Silicon Valley billionaire, Silicon Valley startup, single-payer health, software is eating the world, sovereign wealth fund, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stem cell, Stephen Hawking, Steve Jobs, Steven Levy, Steven Pinker, strong AI, Stuxnet, technological singularity, telepresence, telepresence robot, The Bell Curve by Richard Herrnstein and Charles Murray, The Coming Technological Singularity, The Future of Employment, the long tail, Thomas L Friedman, too big to fail, Tragedy of the Commons, Tyler Cowen, Tyler Cowen: Great Stagnation, uber lyft, union organizing, Vernor Vinge, very high income, warehouse automation, warehouse robotics, Watson beat the top human players on Jeopardy!, women in the workforce

If individuals are ultimately given control over their capital, then it’s inevitable that this scenario would play out for some unlucky people. What would we do for individuals and families who found themselves in this kind of situation? Would they be “too big to fail”? If so, there would be a clear moral hazard problem: people might see little downside in taking excessive risks. If not, we’d have people in genuinely dire situations with little or no hope of escape. The vast majority of people would, of course, act responsibly in the face of this kind of risk. But that might result in its own problems.


pages: 398 words: 108,889

The Paypal Wars: Battles With Ebay, the Media, the Mafia, and the Rest of Planet Earth by Eric M. Jackson

bank run, business process, call centre, creative destruction, disintermediation, Elon Musk, index fund, Internet Archive, iterative process, Joseph Schumpeter, market design, Max Levchin, Menlo Park, Metcalfe’s law, money market fund, moral hazard, Multics, Neal Stephenson, Network effects, new economy, offshore financial centre, PalmPilot, Peter Thiel, Robert Metcalfe, Sand Hill Road, shareholder value, Silicon Valley, Silicon Valley startup, telemarketer, The Chicago School, the new new thing, Turing test

As if all of these existing risks weren’t enough, X.com actually increased its fraud exposure when we created the buyer and seller protection policies earlier in the summer. While successful in shielding us from some media flak, this blanket immunity for our verified buyers and sellers created a moral hazard by introducing negative incentives to our users. Buyers had no reason to shun the too-good-to-be-true offers they found while poking around on eBay, and previously well-behaved sellers had no need to go the extra mile to satisfy a disgruntled customer, knowing PayPal would foot the bill. Though the bank accountbased verification process helped reduce losses on ACH transactions, it failed to offer a predictor of how risky a verified user would become after he received full protection.


pages: 452 words: 110,488

The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead by David Callahan

1960s counterculture, affirmative action, Alan Greenspan, business cycle, Cornelius Vanderbilt, corporate governance, corporate raider, creative destruction, David Brooks, deindustrialization, East Village, eat what you kill, fixed income, forensic accounting, full employment, game design, greed is good, high batting average, housing crisis, illegal immigration, income inequality, job satisfaction, junk bonds, mandatory minimum, market fundamentalism, Mary Meeker, McMansion, Michael Milken, microcredit, moral hazard, multilevel marketing, new economy, New Urbanism, offshore financial centre, oil shock, old-boy network, PalmPilot, plutocrats, postindustrial economy, profit maximization, profit motive, RAND corporation, Ray Oldenburg, rent stabilization, Robert Bork, rolodex, Ronald Reagan, Savings and loan crisis, shareholder value, Shoshana Zuboff, Silicon Valley, Steve Jobs, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, War on Poverty, winner-take-all economy, World Values Survey, young professional, zero-sum game

And while the co-opting of America's political leadership by wealthy interests helps explain why the SEC, the IRS, and many other watchdog agencies don't stand up to wrongdoers, it also explains why conservatives get away with framing America's debate on values so narrowly. Even as conservative politicians talk endlessly about the temptations that come from illegal drugs or sex education or no-fault divorce laws, there are far fewer politicians ready to discuss the moral hazards of an unregulated market. After all, they have reelection campaigns to fund. CHAPTER SIX Trickle-down Corruption FOR THOSE WHO ARE PART OF THE WINNING CLASS, OR TRYing to be, there are plenty of reasons to cheat. The rewards are bigger and the rules are toothless. Yet many Americans with more modest ambitions and more humble means are also cheating.


pages: 571 words: 106,255

The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous

"World Economic Forum" Davos, Airbnb, Alan Greenspan, altcoin, bank run, banks create money, bitcoin, Black Swan, blockchain, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, Charles Babbage, conceptual framework, creative destruction, cryptocurrency, currency manipulation / currency intervention, currency peg, delayed gratification, disintermediation, distributed ledger, Elisha Otis, Ethereum, ethereum blockchain, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, George Gilder, Glass-Steagall Act, global reserve currency, high net worth, initial coin offering, invention of the telegraph, Isaac Newton, iterative process, jimmy wales, Joseph Schumpeter, low interest rates, market bubble, market clearing, means of production, military-industrial complex, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, Paul Samuelson, peer-to-peer, Peter Thiel, price mechanism, price stability, profit motive, QR code, quantum cryptography, ransomware, reserve currency, Richard Feynman, risk tolerance, Satoshi Nakamoto, scientific management, secular stagnation, smart contracts, special drawing rights, Stanford marshmallow experiment, The Nature of the Firm, the payments system, too big to fail, transaction costs, Walter Mischel, We are all Keynesians now, zero-sum game

If the central bank credibly commits to providing liquidity in such cases, however, there will be no fear of a liquidity crisis, which in turn averts the scenario of a bank run and leaves the banking system safe. Fractional reserve banking, or maturity mismatching more generally, is likely to continue to cause financial crises without a central bank using an elastic money supply to bail out these banks. But the presence of a central bank able to bail out the banks creates a major problem of moral hazard for these banks. They can now take excessive risks knowing that the central bank will be inclined to bail them out to avert a systemic crisis. From this we see how banking has evolved into a business that generates returns without risks to bankers and simultaneously creates risks without returns for everyone else.


pages: 332 words: 106,197

The Divide: A Brief Guide to Global Inequality and Its Solutions by Jason Hickel

"World Economic Forum" Davos, Alan Greenspan, Andrei Shleifer, Asian financial crisis, Atahualpa, Bartolomé de las Casas, Bernie Sanders, Bob Geldof, Bretton Woods, British Empire, Cape to Cairo, capital controls, carbon credits, carbon footprint, carbon tax, clean water, collective bargaining, colonial rule, Cornelius Vanderbilt, David Attenborough, David Graeber, David Ricardo: comparative advantage, declining real wages, degrowth, dematerialisation, Doha Development Round, Elon Musk, European colonialism, falling living standards, financial deregulation, flying shuttle, Fractional reserve banking, Francisco Pizarro, full employment, Glass-Steagall Act, Global Witness, Hans Rosling, happiness index / gross national happiness, Howard Zinn, income inequality, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, James Watt: steam engine, laissez-faire capitalism, land reform, land value tax, liberal capitalism, Live Aid, Mahatma Gandhi, Money creation, Monroe Doctrine, Mont Pelerin Society, moral hazard, Naomi Klein, negative emissions, Nelson Mandela, offshore financial centre, oil shale / tar sands, out of africa, Phillips curve, planned obsolescence, plutocrats, purchasing power parity, race to the bottom, rent control, road to serfdom, Ronald Reagan, Scramble for Africa, shareholder value, sharing economy, Silicon Valley, Simon Kuznets, structural adjustment programs, TED Talk, The Chicago School, The Spirit Level, trade route, transatlantic slave trade, transfer pricing, trickle-down economics, Washington Consensus, WikiLeaks, women in the workforce, Works Progress Administration

The presidents of the World Bank and the IMF should be decided not by fiat by the US and Europe, as is presently the case, but instead by merit-based candidacy and democratic election, and should be open to candidates of all nationalities. And the immunity of the World Bank and the IMF needs to be revoked so that loan recipients can hold them accountable. This move is essential to eliminating the moral hazard that presently plagues these institutions, which are free to dish out policy prescriptions without heed for the damage they might cause. The World Trade Organization is already technically democratic, with one vote going to each member country. But in reality richer countries are almost always able to get their way – partly because having bigger markets gives them more bargaining power, and partly because they can afford more and better negotiators.


pages: 409 words: 107,511

Antwerp: The Glory Years by Michael Pye

European colonialism, Gerolamo Cardano, moral hazard, Republic of Letters, spice trade, the market place, trade route, traveling salesman

Yet exchanges were blatant and monumental before they were understood, and they were appearing all across Northern Europe: the high stone gates in Antwerp, the squares in Frankfurt and Cologne and Hamburg and also in Lyons, or the London Royal Exchange, which needed Flemish stone and Flemish builders to put up a facsimile of its Antwerp original.51 Antwerp and its Beurs were imitated even as they could so easily seem a moral hazard, one that could spoil the reputation of decent men. A Mr W.S., who was probably not William Shakespeare, wrote The True Chronicle History … of Thomas, Lord Cromwell, published in 1602. In it, Cromwell goes to Antwerp to manage the books of the Merchant Adventurers, the great English trading company, and he stays straight, with his books nicely balanced.


pages: 356 words: 106,161

The Glass Half-Empty: Debunking the Myth of Progress in the Twenty-First Century by Rodrigo Aguilera

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Alan Greenspan, Anthropocene, availability heuristic, barriers to entry, basic income, benefit corporation, Berlin Wall, Bernie Madoff, Bernie Sanders, bitcoin, Boris Johnson, Branko Milanovic, Bretton Woods, Brexit referendum, Capital in the Twenty-First Century by Thomas Piketty, capitalist realism, carbon footprint, Carmen Reinhart, centre right, clean water, cognitive bias, collapse of Lehman Brothers, Colonization of Mars, computer age, Corn Laws, corporate governance, corporate raider, creative destruction, cryptocurrency, cuban missile crisis, David Graeber, David Ricardo: comparative advantage, death from overwork, decarbonisation, deindustrialization, Deng Xiaoping, Doha Development Round, don't be evil, Donald Trump, Doomsday Clock, Dunning–Kruger effect, Elon Musk, European colonialism, fake news, Fall of the Berlin Wall, first-past-the-post, Francis Fukuyama: the end of history, fundamental attribution error, gig economy, Gini coefficient, Glass-Steagall Act, Great Leap Forward, green new deal, Hans Rosling, housing crisis, income inequality, income per capita, index fund, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jean Tirole, Jeff Bezos, Jeremy Corbyn, Jevons paradox, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, karōshi / gwarosa / guolaosi, Kenneth Rogoff, Kickstarter, lake wobegon effect, land value tax, Landlord’s Game, late capitalism, liberal capitalism, long peace, loss aversion, low interest rates, Mark Zuckerberg, market fundamentalism, means of production, meta-analysis, military-industrial complex, Mont Pelerin Society, moral hazard, moral panic, neoliberal agenda, Network effects, North Sea oil, Northern Rock, offshore financial centre, opioid epidemic / opioid crisis, Overton Window, Pareto efficiency, passive investing, Peter Thiel, plutocrats, principal–agent problem, profit motive, public intellectual, purchasing power parity, race to the bottom, rent-seeking, risk tolerance, road to serfdom, Robert Shiller, Robert Solow, savings glut, Scientific racism, secular stagnation, Silicon Valley, Silicon Valley ideology, Slavoj Žižek, Social Justice Warrior, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Stanislav Petrov, Steven Pinker, structural adjustment programs, surveillance capitalism, tail risk, tech bro, TED Talk, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transatlantic slave trade, trolley problem, unbiased observer, universal basic income, Vilfredo Pareto, Washington Consensus, Winter of Discontent, Y2K, young professional, zero-sum game

., “Reciprocally Interlocking Boards of Directors and Executive Compensation”, The Journal of Financial and Quantitative Analysis, 32(3), Sep. 1997, https://doi.org/10.2307/2331203 7 The principal-agent problem has it that principals (shareholders) and agents (executives) have different objectives, with the former looking to maximize firm value whereas the latter seek their own self-interest (higher pay, creating empires). This creates a moral hazard problem if executive compensation is not designed in a way which aligns these separate incentives. 8 Bebchuk, L.A. and Fried, J.M., “Executive Compensation as an Agency Problem”, Journal of Economic Perspectives, 17(3), Feb,. 2003, http://doi.org/10.2139/ssrn.364220 9 Conyon, M.J., “Executive Compensation and Incentives”, Academy of Management Perspectives, 20(1), Feb. 2006, https://doi.org/10.5465/amp.2006.19873408 10 Melin, A., “Executive Pay”, Bloomberg, 23 Jan. 2018, https://www.bloomberg.com/quicktake/executive-pay 11 Mishel, L. and Wolfe, J., “CEO Compensation has grown 940% since 1978”, Economic Policy Institute, 14 Aug. 2018 https://www.epi.org/publication/ceo-compensation-2018/ 12 “What’s the right ratio for CEO-to-worker pay?”


pages: 1,066 words: 273,703

Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

"there is no alternative" (TINA), "World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Apple's 1984 Super Bowl advert, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bond market vigilante , book value, Boris Johnson, bread and circuses, break the buck, Bretton Woods, Brexit referendum, BRICs, British Empire, business cycle, business logic, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, company town, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, dark matter, deindustrialization, desegregation, Detroit bankruptcy, Dissolution of the Soviet Union, diversification, Doha Development Round, Donald Trump, Edward Glaeser, Edward Snowden, en.wikipedia.org, energy security, eurozone crisis, Fall of the Berlin Wall, family office, financial engineering, financial intermediation, fixed income, Flash crash, forward guidance, friendly fire, full employment, global reserve currency, global supply chain, global value chain, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, high-speed rail, housing crisis, Hyman Minsky, illegal immigration, immigration reform, income inequality, interest rate derivative, interest rate swap, inverted yield curve, junk bonds, Kenneth Rogoff, large denomination, light touch regulation, Long Term Capital Management, low interest rates, margin call, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, military-industrial complex, mittelstand, money market fund, moral hazard, mortgage debt, mutually assured destruction, negative equity, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, old-boy network, open economy, opioid epidemic / opioid crisis, paradox of thrift, Peter Thiel, Ponzi scheme, Post-Keynesian economics, post-truth, predatory finance, price stability, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, Steve Bannon, structural adjustment programs, tail risk, The Great Moderation, Tim Cook: Apple, too big to fail, trade liberalization, upwardly mobile, Washington Consensus, We are the 99%, white flight, WikiLeaks, women in the workforce, Works Progress Administration, yield curve, éminence grise

The Fed’s actions forestalled what might have been a disruptive and chaotic bankruptcy. But the inducements that J.P. Morgan had extracted were debatable, to say the least. Paul Volcker, the legendary ex-chairman of the Fed, would characterize them as extending “to the very edge of its lawful and implied powers.”16 Strict advocates of moral hazard logic would forever after argue that it was the Bear rescue that set up the Lehman disaster.17 With one investment bank having been rescued, Lehman’s management felt safe. A solution for their problems would be found too. They could afford to take their time finding the best possible deal, an attitude that would cost them dearly.

On the invocation of 13(3), see Wallach, To the Edge, 46–49. 16. P. Coy, “Volcker Shuns the Blame Game,” Bloomberg Businessweek, April 10, 2008, https://www.bloomberg.com/news/articles/2008-04-10/volcker-shuns-the-blame-gamebusinessweek-business-news-stock-market-and-financial-advice. 17. W. Poole, “Moral Hazard: The Long-Lasting Legacy of Bailouts,” Financial Analysts Journal 65, no. 6 (2009), 17–23; J. H. Cochrane, “Lessons from the Financial Crisis,” Hoover Institution, January 11, 2010; and V. Reinhart, “A Year of Living Dangerously: The Management of the Financial Crisis in 2008,” Journal of Economic Perspectives 25 (2011), 71–90. 18.


The Global Money Markets by Frank J. Fabozzi, Steven V. Mann, Moorad Choudhry

asset allocation, asset-backed security, bank run, Bear Stearns, Bretton Woods, buy and hold, collateralized debt obligation, credit crunch, currency risk, discounted cash flows, discrete time, disintermediation, Dutch auction, financial engineering, fixed income, Glass-Steagall Act, high net worth, intangible asset, interest rate derivative, interest rate swap, land bank, large denomination, locking in a profit, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, money market fund, moral hazard, mortgage debt, paper trading, Right to Buy, short selling, stocks for the long run, time value of money, value at risk, Y2K, yield curve, zero-coupon bond, zero-sum game

If the bank is sufficiently large, its failure could have a significant negative impact on the national and global economy, as other banks, businesses and ultimately individuals also suffered losses. The large “money center” banks5 are obvious examples of the type of firm that is considered too important to be allowed to fail. It is not desirable though for regulators or national governments to present explicit guarantees against failure however, since this introduces the risk of moral hazard as risk of loss is reduced.6 There would also be an element of subsidy as a bank that was perceived as benefiting from an explicit or implicit guarantee would be able to raise finance at belowmarket cost. This introduces an anti-competitive element in one of the most important sectors of the economy. 5 Known as “high street” banks in the United Kingdom.


pages: 422 words: 114,198

The Wright Brothers by David McCullough

Charles Lindbergh, Louis Blériot, moral hazard, Neil Armstrong, NetJets, safety bicycle

One Philadelphia physician, writing in The American Journal of Obstetrics and Diseases of Women and Children, concluded from his observations that “for physical exercise for both men and women, the bicycle is one of the greatest inventions of the nineteenth century.” Voices were raised in protest. Bicycles were proclaimed morally hazardous. Until now children and youth were unable to stray very far from home on foot. Now, one magazine warned, fifteen minutes could put them miles away. Because of bicycles, it was said, young people were not spending the time they should with books, and more seriously that suburban and country tours on bicycles were “not infrequently accompanied by seductions.”


pages: 437 words: 113,173

Age of Discovery: Navigating the Risks and Rewards of Our New Renaissance by Ian Goldin, Chris Kutarna

"World Economic Forum" Davos, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, Airbnb, Albert Einstein, AltaVista, Asian financial crisis, asset-backed security, autonomous vehicles, banking crisis, barriers to entry, battle of ideas, Bear Stearns, Berlin Wall, bioinformatics, bitcoin, Boeing 747, Bonfire of the Vanities, bread and circuses, carbon tax, clean water, collective bargaining, Colonization of Mars, Credit Default Swap, CRISPR, crowdsourcing, cryptocurrency, Dava Sobel, demographic dividend, Deng Xiaoping, digital divide, Doha Development Round, double helix, driverless car, Edward Snowden, Elon Musk, en.wikipedia.org, epigenetics, experimental economics, Eyjafjallajökull, failed state, Fall of the Berlin Wall, financial innovation, full employment, Galaxy Zoo, general purpose technology, Glass-Steagall Act, global pandemic, global supply chain, Higgs boson, Hyperloop, immigration reform, income inequality, indoor plumbing, industrial cluster, industrial robot, information retrieval, information security, Intergovernmental Panel on Climate Change (IPCC), intermodal, Internet of things, invention of the printing press, Isaac Newton, Islamic Golden Age, Johannes Kepler, Khan Academy, Kickstarter, Large Hadron Collider, low cost airline, low skilled workers, Lyft, Mahbub ul Haq, Malacca Straits, mass immigration, Max Levchin, megacity, Mikhail Gorbachev, moral hazard, Nelson Mandela, Network effects, New Urbanism, non-tariff barriers, Occupy movement, On the Revolutions of the Heavenly Spheres, open economy, Panamax, Paris climate accords, Pearl River Delta, personalized medicine, Peter Thiel, post-Panamax, profit motive, public intellectual, quantum cryptography, rent-seeking, reshoring, Robert Gordon, Robert Metcalfe, Search for Extraterrestrial Intelligence, Second Machine Age, self-driving car, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Skype, smart grid, Snapchat, special economic zone, spice trade, statistical model, Stephen Hawking, Steve Jobs, Stuxnet, synthetic biology, TED Talk, The Future of Employment, too big to fail, trade liberalization, trade route, transaction costs, transatlantic slave trade, uber lyft, undersea cable, uranium enrichment, We are the 99%, We wanted flying cars, instead we got 140 characters, working poor, working-age population, zero day

In the UK in 2008, the top three banks owned 80 percent of the market (up from 50 percent in 1997).54 The phrase “too big to fail” entered public discourse to describe these behemoths. Their executives knew their respective governments would never let them go bust—the ensuing chaos would be too great. Their investment discipline weakened—a phenomenon economists aptly call “moral hazard.” The biggest financial institutions began to take excessive risks, knowing that should things go seriously awry, taxpayers would bail them out. And indeed, we did. Concentration also rose at the level of whole economies, as booming financial sectors loomed ever larger in the total economic mix.


pages: 424 words: 115,035

How Will Capitalism End? by Wolfgang Streeck

"there is no alternative" (TINA), accounting loophole / creative accounting, air traffic controllers' union, Airbnb, Alan Greenspan, basic income, behavioural economics, Ben Bernanke: helicopter money, billion-dollar mistake, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, Clayton Christensen, collective bargaining, conceptual framework, corporate governance, creative destruction, credit crunch, David Brooks, David Graeber, debt deflation, deglobalization, deindustrialization, disruptive innovation, en.wikipedia.org, eurozone crisis, failed state, financial deregulation, financial innovation, first-past-the-post, fixed income, full employment, Gini coefficient, global reserve currency, Google Glasses, haute cuisine, income inequality, information asymmetry, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, junk bonds, Kenneth Rogoff, labour market flexibility, labour mobility, late capitalism, liberal capitalism, low interest rates, market bubble, means of production, military-industrial complex, moral hazard, North Sea oil, offshore financial centre, open borders, pension reform, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, post-industrial society, private sector deleveraging, profit maximization, profit motive, quantitative easing, reserve currency, rising living standards, Robert Gordon, savings glut, secular stagnation, shareholder value, sharing economy, sovereign wealth fund, tacit knowledge, technological determinism, The Future of Employment, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Uber for X, upwardly mobile, Vilfredo Pareto, winner-take-all economy, Wolfgang Streeck

From the perspective of systemic stability what seems more important than inequality as such is that it may already have gone so far that the rich may rightly consider their fate and that of their families to have become independent from the fates of the societies from which they extract their wealth. As a result, they can afford no longer to care about them. This becomes a problem – one of ‘moral hazard’ – when differences in wealth become so extensive that they give rise to a fusion of economic and political power – that is, to oligarchy. To assess the extent to which growing inequality in America has produced an oligarchic power structure, Jeffrey Winters has calculated what he calls a Material Power Index for the contemporary United States.41 One version of that index considers the relation between the average income of the top 400 taxpayers and of the bottom 90 per cent.


Hopes and Prospects by Noam Chomsky

air traffic controllers' union, Alan Greenspan, Albert Einstein, banking crisis, Bear Stearns, Berlin Wall, Bretton Woods, British Empire, capital controls, colonial rule, corporate personhood, Credit Default Swap, cuban missile crisis, David Ricardo: comparative advantage, deskilling, en.wikipedia.org, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Firefox, Glass-Steagall Act, high-speed rail, Howard Zinn, Hyman Minsky, invisible hand, liberation theology, market fundamentalism, Martin Wolf, Mikhail Gorbachev, Monroe Doctrine, moral hazard, Nelson Mandela, new economy, nuremberg principles, one-state solution, open borders, Plutonomy: Buying Luxury, Explaining Global Imbalances, public intellectual, Ralph Waldo Emerson, RAND corporation, Robert Solow, Ronald Reagan, Savings and loan crisis, Seymour Hersh, structural adjustment programs, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, trade liberalization, uranium enrichment, Washington Consensus

See below, pp. 226f. 8. Eric Dash, New York Times, June 10, 2009. 9. Theo Francis and Peter Coy, “No Big Fix for Global Finance,” Business Week, September 9, 2009. David Cho, “Banks ‘Too Big to Fail’ Have Grown Even Bigger; Behemoths Born of the Bailout Reduce Consumer Choice, Tempt Corporate Moral Hazard,” Washington Post, August 28, 2009. Martin Wolf, Financial Times, September 15, 2009. 10. “Fewer American See Solid Evidence of Global Warming,” Pew survey reports, October 22, 2009, http://people-press.org/report/556/. 11. Clifford Krauss and Jad Mouawad, New York Times, August 19, 2009; John Carey, Business Week, September 8, 2009. 12.


The Diet Myth: Why America's Obsessions With Weight Is Hazardous to Your Health by Paul Campos

caloric restriction, caloric restriction, cognitive dissonance, confounding variable, correlation does not imply causation, feminist movement, longitudinal study, moral hazard, moral panic, profit maximization, Saturday Night Live, upwardly mobile

According to Weber, the English Puritans, in particular, had an ambivalent attitude toward the accumulation of wealth. On the one hand, he described their attitude as one that saw “riches as such [as] a great danger, their temptations unremitting, the effort to acquire them not only senseless when compared with the surpassing importance of the Kingdom of God, but also morally hazardous.” Yet the Puritans had no fundamental objection to riches, as long as they were enjoyed (or perhaps more accurately, were not enjoyed) in the right spirit. For this brand of Protestantism, Weber wrote, The real object of moral condemnation is, in particular, relaxation in the possession of property and enjoyment of riches, resulting in sloth and the lusts of the flesh, and above all in distraction from the pursuit of the “holy” life.


pages: 459 words: 118,959

Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff by Christine S. Richard

activist fund / activist shareholder / activist investor, Alan Greenspan, Asian financial crisis, asset-backed security, banking crisis, Bear Stearns, Bernie Madoff, Blythe Masters, book value, buy and hold, Carl Icahn, cognitive dissonance, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, electricity market, family office, financial innovation, fixed income, forensic accounting, glass ceiling, Greenspan put, Long Term Capital Management, market bubble, money market fund, moral hazard, old-boy network, Pershing Square Capital Management, Ponzi scheme, profit motive, Savings and loan crisis, short selling, short squeeze, statistical model, stock buybacks, subprime mortgage crisis, white flight, zero-sum game

On that hot August morning, new problems were looming. The group took seats around a conference table and Ackman delivered the “Who’s Holding the Bag?” presentation he had given at the Ira Sohn Investment Conference in May. He described how the incentives to securitize and sell mortgages created enormous moral hazard in the mortgage market, how faulty structures allowed billions of dollars of doomed securities to be built out of the riskiest parts of bonds, and how small losses on $100 billion portfolios of collateralized-debt obligations (CDOs) could wipe out a bond insurer’s entire capital base. He also reviewed other issues specific to the insurance department’s role in overseeing the bond insurers, such as how bond insurers were engaging in prohibited credit-default swaps (CDSs) and how MBIA’s growing fixed-income arbitrage business amounted to a disguised dividend from its regulated insurance subsidiary.


pages: 289 words: 113,211

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber

affirmative action, Albert Einstein, asset allocation, backtesting, beat the dealer, behavioural economics, Black Swan, Black-Scholes formula, Bonfire of the Vanities, book value, butterfly effect, commoditize, commodity trading advisor, computer age, computerized trading, disintermediation, diversification, double entry bookkeeping, Edward Lorenz: Chaos theory, Edward Thorp, family office, financial engineering, financial innovation, fixed income, frictionless, frictionless market, Future Shock, George Akerlof, global macro, implied volatility, index arbitrage, intangible asset, Jeff Bezos, Jim Simons, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, loose coupling, managed futures, margin call, market bubble, market design, Mary Meeker, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shock, Paul Samuelson, Pierre-Simon Laplace, proprietary trading, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk/return, Robert Shiller, Robert Solow, rolodex, Saturday Night Live, selection bias, shareholder value, short selling, Silicon Valley, statistical arbitrage, tail risk, The Market for Lemons, time value of money, too big to fail, transaction costs, tulip mania, uranium enrichment, UUNET, William Langewiesche, yield curve, zero-coupon bond, zero-sum game

But if viewed rigorously by the counterparty, it would be seen as a scheme that could expose the seller to huge, uncontrollable risks. With most warrants, the seller can hedge the risk by taking a dynamic position in the underlying asset. This could not be done with a warrant on the future earnings of LTCM, because that was not a traded security. Even worse, there was the problem of moral hazard. LTCM could change the nature of its strategy or leverage at any time; the risk of the fund could be increased at its whim. LTCM would benefit if that increased risk bore fruit, while the warrant writer would be left holding the bag if things blew up. The very issuance of the warrant would in fact increase the incentive for the hedge fund to do so, because it was increasingly gambling with other people’s money.


pages: 354 words: 118,970

Transaction Man: The Rise of the Deal and the Decline of the American Dream by Nicholas Lemann

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, Abraham Maslow, Affordable Care Act / Obamacare, Airbnb, airline deregulation, Alan Greenspan, Albert Einstein, augmented reality, basic income, Bear Stearns, behavioural economics, Bernie Sanders, Black-Scholes formula, Blitzscaling, buy and hold, capital controls, Carl Icahn, computerized trading, Cornelius Vanderbilt, corporate governance, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, deal flow, dematerialisation, diversified portfolio, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, Fairchild Semiconductor, financial deregulation, financial innovation, fixed income, future of work, George Akerlof, gig economy, Glass-Steagall Act, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Ida Tarbell, index fund, information asymmetry, invisible hand, Irwin Jacobs, Joi Ito, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kickstarter, life extension, Long Term Capital Management, Mark Zuckerberg, Mary Meeker, mass immigration, means of production, Metcalfe’s law, Michael Milken, money market fund, Mont Pelerin Society, moral hazard, Myron Scholes, Neal Stephenson, new economy, Norman Mailer, obamacare, PalmPilot, Paul Samuelson, Performance of Mutual Funds in the Period, Peter Thiel, price mechanism, principal–agent problem, profit maximization, proprietary trading, prudent man rule, public intellectual, quantitative trading / quantitative finance, Ralph Nader, Richard Thaler, road to serfdom, Robert Bork, Robert Metcalfe, rolodex, Ronald Coase, Ronald Reagan, Sand Hill Road, Savings and loan crisis, shareholder value, short selling, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Snow Crash, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, TaskRabbit, TED Talk, The Nature of the Firm, the payments system, the strength of weak ties, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, too big to fail, transaction costs, universal basic income, War on Poverty, white flight, working poor

Institutions have many new avenues for taking risk that are difficult for even sophisticated market participants to fully understand, and the interrelationships are even more complex … In the case of banks, the existence of deposit insurance coupled with access to the payments system [operated by the Federal Reserve] creates moral hazard with a clear incentive for excessive risk-taking. This is, after all, the rationale for regulating and supervising banks. In the case of other financial intermediaries there may be implicit but not explicit guarantees because many are too big to fail—a recognition that the failure of such entities also creates a systemic risk.


pages: 405 words: 112,470

Together by Vivek H. Murthy, M.D.

Airbnb, call centre, cognitive bias, coronavirus, COVID-19, crowdsourcing, death from overwork, gentrification, gig economy, income inequality, index card, karōshi / gwarosa / guolaosi, longitudinal study, Lyft, Mahatma Gandhi, medical residency, meta-analysis, moral hazard, Nelson Mandela, opioid epidemic / opioid crisis, Ralph Waldo Emerson, randomized controlled trial, rent control, ride hailing / ride sharing, Ronald Reagan, sharing economy, Silicon Valley, Silicon Valley startup, Skype, Snapchat, social distancing, social intelligence, stem cell, TED Talk, twin studies, Uber and Lyft, uber lyft

As John Donne wrote in 1624, “No man is an island entire of itself . . . any man’s death diminishes me because I am involved in mankind.”2 Christianity, like the other major religious traditions, emphasized connective qualities such as care, humility, and empathy because they helped bond congregants to one another and to God. When everyone organized their lives around God, and the church provided not just community but also security, there was relatively little risk of parishioners voluntarily leaving the fold. But after Shakespeare, other writers began to take on social isolation as a moral hazard. In 1667, John Milton went so far as to link loneliness to Satan in Paradise Lost.3 When Milton described Satan taking “lonely steps” out of hell to reach the Garden of Eden and disrupt Adam and Eve’s innocent bliss, he wasn’t commenting on Satan’s feelings. Rather, he was casting a moral shroud around loneliness.


pages: 521 words: 110,286

Them and Us: How Immigrants and Locals Can Thrive Together by Philippe Legrain

affirmative action, Albert Einstein, AlphaGo, autonomous vehicles, Berlin Wall, Black Lives Matter, Boris Johnson, Brexit referendum, British Empire, call centre, centre right, Chelsea Manning, clean tech, coronavirus, corporate social responsibility, COVID-19, creative destruction, crowdsourcing, data science, David Attenborough, DeepMind, Demis Hassabis, demographic dividend, digital divide, discovery of DNA, Donald Trump, double helix, Edward Glaeser, en.wikipedia.org, eurozone crisis, failed state, Fall of the Berlin Wall, future of work, illegal immigration, immigration reform, informal economy, Jane Jacobs, job automation, Jony Ive, labour market flexibility, lockdown, low cost airline, low interest rates, low skilled workers, lump of labour, Mahatma Gandhi, Mark Zuckerberg, Martin Wolf, Mary Meeker, mass immigration, moral hazard, Mustafa Suleyman, Network effects, new economy, offshore financial centre, open borders, open immigration, postnationalism / post nation state, purchasing power parity, remote working, Richard Florida, ride hailing / ride sharing, Rishi Sunak, Ronald Reagan, Silicon Valley, Skype, SoftBank, Steve Jobs, tech worker, The Death and Life of Great American Cities, The future is already here, The Future of Employment, Tim Cook: Apple, Tyler Cowen, urban sprawl, WeWork, Winter of Discontent, women in the workforce, working-age population

A study on practices in the area of regularisation of illegally staying third-country nationals in the Member States of the European Union’, ICMPD Policy Brief, 2009. http://research.icmpd.org/projects/migration-governance/regine/ 65 Tom K. Wong and Hillary Kosnac, ‘Does The Legalization of Undocumented Immigrants in the US Encourage Unauthorized Immigration from Mexico? An Empirical Analysis of the Moral Hazard of Legalization’, International Migration, 55:2, April 2017, pp. 159–73. https://onlinelibrary.wiley.com/doi/abs/10.1111/imig.12319 66 GLA Economics, ‘Economic impact on the London and UK economy of an earned regularisation of irregular migrants to the UK’, May 2009. https://www.london.gov.uk/sites/default/files/gla_migrate_files_destination/irregular-migrants-report.pdf 67 ‘What are the 10 and 20 year rules on long residence?’


pages: 387 words: 119,244

Making It Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy by Iain Martin

Alan Greenspan, asset-backed security, bank run, Basel III, Bear Stearns, beat the dealer, Big bang: deregulation of the City of London, Bletchley Park, call centre, central bank independence, computer age, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, deindustrialization, deskilling, Edward Thorp, Etonian, Eugene Fama: efficient market hypothesis, eurozone crisis, falling living standards, financial deregulation, financial engineering, financial innovation, G4S, Glass-Steagall Act, high net worth, interest rate swap, invisible hand, joint-stock company, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, long term incentive plan, low interest rates, moral hazard, negative equity, Neil Kinnock, Nick Leeson, North Sea oil, Northern Rock, old-boy network, pets.com, proprietary trading, Red Clydeside, shareholder value, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, value at risk, warehouse robotics

The liquidity problem was making life very difficult, he explained to Darling, and the Governor of the Bank of England had to do something or little Northern Rock would be the least of their problems. But Mervyn King would not listen, said Goodwin. Darling knew this to be true, as he had had similar conversations with King since the beginning of the credit crunch. King’s view was that the banks had got themselves into this mess and that it would introduce ‘moral hazard’ and ‘rewards for failure’ if the taxpayer were to start bailing them out. It was a fine academic theory, Darling felt, but not much use if the banking system ran out of money in the middle of a panic and then crashed the economy. Darling was also curious to know why Goodwin had gone ahead and paid so much for ABN Amro, when the signs were that it was overvalued at the top of the market.


pages: 392 words: 114,189

The Ransomware Hunting Team: A Band of Misfits' Improbable Crusade to Save the World From Cybercrime by Renee Dudley, Daniel Golden

2021 United States Capitol attack, Amazon Web Services, Bellingcat, Berlin Wall, bitcoin, Black Lives Matter, blockchain, Brian Krebs, call centre, centralized clearinghouse, company town, coronavirus, corporate governance, COVID-19, cryptocurrency, data science, disinformation, Donald Trump, fake it until you make it, Hacker News, heat death of the universe, information security, late fees, lockdown, Menlo Park, Minecraft, moral hazard, offshore financial centre, Oklahoma City bombing, operational security, opioid epidemic / opioid crisis, Picturephone, pirate software, publish or perish, ransomware, Richard Feynman, Ross Ulbricht, seminal paper, smart meter, social distancing, strikebreaker, subprime mortgage crisis, tech worker, Timothy McVeigh, union organizing, War on Poverty, Y2K, zero day

She raised a “legitimate question of whether we could actually do anything,” he said. “We didn’t have the personnel, or the resources, nor the mandate to get out there and fix people’s networks for them. They need to be making the investments; we are not equipped to go fix their problems. If we did, there would be a bit of a moral hazard where everybody’s just gonna say, ‘Fuck it, if we have a problem, CISA will come in and fix it for us.’” * * * As DHS dithered, the U.S. Attorney’s Office for the Eastern District of North Carolina oversaw the criminal investigation into RobbinHood, staying in touch with Baltimore city solicitor Andre Davis.


The Future of Technology by Tom Standage

air freight, Alan Greenspan, barriers to entry, business process, business process outsourcing, call centre, Clayton Christensen, computer vision, connected car, corporate governance, creative destruction, disintermediation, disruptive innovation, distributed generation, double helix, experimental economics, financial engineering, Ford Model T, full employment, hydrogen economy, hype cycle, industrial robot, informal economy, information asymmetry, information security, interchangeable parts, job satisfaction, labour market flexibility, Larry Ellison, Marc Andreessen, Marc Benioff, market design, Menlo Park, millennium bug, moral hazard, natural language processing, Network effects, new economy, Nicholas Carr, optical character recognition, PalmPilot, railway mania, rent-seeking, RFID, Salesforce, seminal paper, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, six sigma, Skype, smart grid, software as a service, spectrum auction, speech recognition, stem cell, Steve Ballmer, Steve Jurvetson, technological determinism, technology bubble, telemarketer, transcontinental railway, vertical integration, Y2K

The person or company best placed to protect a system may, for example, be insufficiently motivated to do so, because the costs of failure fall on others. Such problems, Mr Anderson argues, are best examined using economic concepts, such as externalities, asymmetric information, adverse selection and moral hazard. A classic example is that of fraud involving cash dispensers (automated teller machines). Mr Anderson investigated a number of cases of “phantom withdrawals”, which customers said they never made, at British banks. He concluded that almost every time the security technology was working correctly, and that misconfiguration or mismanagement of the machines by the banks was to blame for the error.


pages: 472 words: 117,093

Machine, Platform, Crowd: Harnessing Our Digital Future by Andrew McAfee, Erik Brynjolfsson

"World Economic Forum" Davos, 3D printing, additive manufacturing, AI winter, Airbnb, airline deregulation, airport security, Albert Einstein, algorithmic bias, AlphaGo, Amazon Mechanical Turk, Amazon Web Services, Andy Rubin, AOL-Time Warner, artificial general intelligence, asset light, augmented reality, autism spectrum disorder, autonomous vehicles, backpropagation, backtesting, barriers to entry, behavioural economics, bitcoin, blockchain, blood diamond, British Empire, business cycle, business process, carbon footprint, Cass Sunstein, centralized clearinghouse, Chris Urmson, cloud computing, cognitive bias, commoditize, complexity theory, computer age, creative destruction, CRISPR, crony capitalism, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, data science, Dean Kamen, deep learning, DeepMind, Demis Hassabis, discovery of DNA, disintermediation, disruptive innovation, distributed ledger, double helix, driverless car, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Ethereum, ethereum blockchain, everywhere but in the productivity statistics, Evgeny Morozov, fake news, family office, fiat currency, financial innovation, general purpose technology, Geoffrey Hinton, George Akerlof, global supply chain, Great Leap Forward, Gregor Mendel, Hernando de Soto, hive mind, independent contractor, information asymmetry, Internet of things, inventory management, iterative process, Jean Tirole, Jeff Bezos, Jim Simons, jimmy wales, John Markoff, joint-stock company, Joseph Schumpeter, Kickstarter, Kiva Systems, law of one price, longitudinal study, low interest rates, Lyft, Machine translation of "The spirit is willing, but the flesh is weak." to Russian and back, Marc Andreessen, Marc Benioff, Mark Zuckerberg, meta-analysis, Mitch Kapor, moral hazard, multi-sided market, Mustafa Suleyman, Myron Scholes, natural language processing, Network effects, new economy, Norbert Wiener, Oculus Rift, PageRank, pattern recognition, peer-to-peer lending, performance metric, plutocrats, precision agriculture, prediction markets, pre–internet, price stability, principal–agent problem, Project Xanadu, radical decentralization, Ray Kurzweil, Renaissance Technologies, Richard Stallman, ride hailing / ride sharing, risk tolerance, Robert Solow, Ronald Coase, Salesforce, Satoshi Nakamoto, Second Machine Age, self-driving car, sharing economy, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, speech recognition, statistical model, Steve Ballmer, Steve Jobs, Steven Pinker, supply-chain management, synthetic biology, tacit knowledge, TaskRabbit, Ted Nelson, TED Talk, the Cathedral and the Bazaar, The Market for Lemons, The Nature of the Firm, the strength of weak ties, Thomas Davenport, Thomas L Friedman, too big to fail, transaction costs, transportation-network company, traveling salesman, Travis Kalanick, Two Sigma, two-sided market, Tyler Cowen, Uber and Lyft, Uber for X, uber lyft, ubercab, Vitalik Buterin, warehouse robotics, Watson beat the top human players on Jeopardy!, winner-take-all economy, yield management, zero day

. ¶¶ For example, Oliver Hart and Bengt Holmstrom, The Theory of Contracts, MIT Department of Economics Working Paper 418 (March 1986), https://dspace.mit.edu/bitstream/handle/1721.1/64265/theoryofcontract00hart.pdf%3Bjsessionid%3DD2F89D14123801EBB5A616B328AB8CFC?sequence%3D1. Holmström’s earlier, pathbreaking work on the “principal-agent problem” (Bengt Holmström, “Moral Hazard and Observability,” Bell Journal of Economics 10, no. 1 [1979]: 74–91, http://www.jstor.org/stable/3003320), provided a foundation for a large subsequent economic literature on the economics of incentive contracts, including incomplete contracts theory. As Holmström and Paul Milgrom noted, the firm itself, including all its rules and norms, can be usefully thought of as an incentive system.


pages: 312 words: 93,504

Common Knowledge?: An Ethnography of Wikipedia by Dariusz Jemielniak

Andrew Keen, barriers to entry, Benevolent Dictator For Life (BDFL), citation needed, collaborative consumption, collaborative editing, commons-based peer production, conceptual framework, continuous integration, crowdsourcing, Debian, deskilling, digital Maoism, disinformation, en.wikipedia.org, Filter Bubble, Free Software Foundation, Gabriella Coleman, Google Glasses, Guido van Rossum, Hacker Ethic, hive mind, Internet Archive, invisible hand, Jaron Lanier, jimmy wales, job satisfaction, Julian Assange, knowledge economy, knowledge worker, Menlo Park, moral hazard, online collectivism, pirate software, RFC: Request For Comment, Richard Stallman, selection bias, Silicon Valley, Skype, slashdot, social software, Stewart Brand, the Cathedral and the Bazaar, The Hackers Conference, The Nature of the Firm, the strength of weak ties, The Wisdom of Crowds, transaction costs, Wayback Machine, WikiLeaks, wikimedia commons, Wikivoyage, Yochai Benkler, zero-sum game

Johnson, S. (2012). Future perfect: The case for progress in a networked age. New York: Riverhead. Jones, G. R., & George, J. M. (1998). The experience and evolution of trust: Implications for cooperation and teamwork. Academy of Management Review, 23(3), 531–546. Jones, T. M., & Bowie, N. E. (1998). Moral hazards on the road to the “virtual” corporation. Business Ethics Quarterly, 8(2), 273–292. Kamm, O. (2007, August 16). Wisdom? More like dumbness of the crowds. Oliver Kamm blog. Retrieved from http://oliverkamm.typepad.com/blog/2007/08/wisdom-more -lik.html 2 5 8    R e f e r e n c e s Kane, G. C. (2009, August).


pages: 414 words: 121,243

What's Left?: How Liberals Lost Their Way by Nick Cohen

"hyperreality Baudrillard"~20 OR "Baudrillard hyperreality", anti-communist, Ayatollah Khomeini, Berlin Wall, Boycotts of Israel, British Empire, centre right, critical race theory, DeepMind, disinformation, Etonian, failed state, Fall of the Berlin Wall, Farzad Bazoft, feminist movement, government statistician, Great Leap Forward, haute couture, kremlinology, liberal world order, light touch regulation, mass immigration, military-industrial complex, moral hazard, Naomi Klein, no-fly zone, plutocrats, post-industrial society, profit motive, public intellectual, Ralph Nader, road to serfdom, Ronald Reagan, Scientific racism, sensible shoes, the scientific method, union organizing, upwardly mobile, Yom Kippur War

From the sand bags Nick Cohen has watched as they turned their back on the working class, once the object of Utopian hopes on the Left and unreasonable fears on the Right, and lovingly embraced the upper class, once the object of surly contempt on the Left. In Waiting for the Etonians are gathered his selected writings that cover the span of Labour's love affair with the Right and the moral hazard that it has culminated in. It is a romance which has not only broken its traditional bond with the working classes and undermined the very values on which the party was founded, but has now left it with little more to do than warm the seat for the next Conservative Prime Minister. Buy the ebook here INDEX The pagination of this electronic edition does not match the edition from which it was created.


pages: 602 words: 120,848

Winner-Take-All Politics: How Washington Made the Rich Richer-And Turned Its Back on the Middle Class by Paul Pierson, Jacob S. Hacker

accounting loophole / creative accounting, active measures, affirmative action, air traffic controllers' union, Alan Greenspan, asset allocation, barriers to entry, Bear Stearns, Bonfire of the Vanities, business climate, business cycle, carried interest, Cass Sunstein, clean water, collective bargaining, corporate governance, Credit Default Swap, David Brooks, desegregation, employer provided health coverage, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, Glass-Steagall Act, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, John Bogle, knowledge economy, laissez-faire capitalism, Martin Wolf, medical bankruptcy, moral hazard, Nate Silver, new economy, night-watchman state, offshore financial centre, oil shock, Paul Volcker talking about ATMs, Powell Memorandum, Ralph Nader, Ronald Reagan, Savings and loan crisis, shareholder value, Silicon Valley, Tax Reform Act of 1986, The Wealth of Nations by Adam Smith, three-martini lunch, too big to fail, trickle-down economics, union organizing, very high income, War on Poverty, winner-take-all economy, women in the workforce

Wall Street Journal, April 28, 2008. 58 Martin Wolf, “Regulators Should Intervene in Bankers’ Pay,” Financial Times, January 16, 2008. 59 Jenny Anderson, “Atop Hedge Funds, Richest of the Rich Get Even More So,” New York Times, May 26, 2006; Jenny Anderson and Julie Creswell, “Top Hedge Fund Managers Earn Over $240 Million,” New York Times, April 24, 2007; Jenny Anderson, “Wall Street Winners Get Billion-Dollar Paydays,” New York Times, April 16, 2008. 60 Christine Harper, “Wall Street Bonuses Hit Record $39 Billion for 2007,” Bloomberg, January 17, 2008, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHPBhz66H9eo. 61 Robert Kuttner, The Squandering of America (New York: Knopf, 2007). 62 David Moss, “An Ounce of Prevention: Financial Regulation, Moral Hazard, and the End of ‘Too Big to Fail,’” Harvard Magazine, September–October 2009, 24–29. 63 Robert J. Gordon and Ian Dew-Becker, “Controversies About the Rise of American Inequality: A Survey,” NBER Working Paper No. 13982 (May 2008), 25. 64 Philippon and Reshef, “Wages and Human Capital in the U.S.


pages: 420 words: 124,202

The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention by William Rosen

Albert Einstein, All science is either physics or stamp collecting, barriers to entry, Charles Babbage, collective bargaining, computer age, Copley Medal, creative destruction, David Ricardo: comparative advantage, decarbonisation, delayed gratification, Fellow of the Royal Society, flying shuttle, Flynn Effect, fudge factor, full employment, Higgs boson, independent contractor, invisible hand, Isaac Newton, Islamic Golden Age, iterative process, James Hargreaves, James Watt: steam engine, John Harrison: Longitude, Joseph Schumpeter, Joseph-Marie Jacquard, knowledge economy, language acquisition, Lewis Mumford, moral hazard, Network effects, Panopticon Jeremy Bentham, Paul Samuelson, Peace of Westphalia, Peter Singer: altruism, QWERTY keyboard, Ralph Waldo Emerson, rent-seeking, Robert Solow, Ronald Coase, Simon Kuznets, spinning jenny, tacit knowledge, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, three-masted sailing ship, transaction costs, transcontinental railway, zero-sum game, éminence grise

Prior to the introduction of the jenny, Britain’s spinning was performed largely by what we would call independent contractors: the original cottage industrialists, taking raw materials from manufacturers who “put out” for contract the production of finished fabric. This was efficient—no huge capital expenses for the manufacturer, for example—but it contained within its organization what one might call a moral hazard. Since independent spinners worked for more than one manufacturer, they frequently juggled their contracts, delaying manufacturer number one in order to meet an order for number two. At its worst, this meant taking one manufacturer’s raw material and using it to produce goods for another, hiding the choice by making a flimsier yarn for both.


pages: 388 words: 125,472

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

anti-communist, Asian financial crisis, autism spectrum disorder, bank run, battle of ideas, Big bang: deregulation of the City of London, bonus culture, Boris Johnson, 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, disinformation, 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, Jon Ronson, laissez-faire capitalism, land bank, light touch regulation, low interest rates, market fundamentalism, mass immigration, Monroe Doctrine, Mont Pelerin Society, moral hazard, Neil Kinnock, night-watchman state, Nixon triggered the end of the Bretton Woods system, Northern Rock, Occupy movement, offshore financial centre, old-boy network, open borders, Overton Window, plutocrats, popular capitalism, post-war consensus, 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, subprime mortgage crisis, Suez crisis 1956, The Wealth of Nations by Adam Smith, transfer pricing, Tyler Cowen, union organizing, unpaid internship, Washington Consensus, We are all Keynesians now, wealth creators, Winter of Discontent

He has worked as head of government relations at the investment bank Morgan Stanley, as a senior advisor to Boris Johnson, the Conservative Mayor of London, and as a journalist for the BBC and the Observer and Times newspapers. Browne is candid about what the banking bailout represented. ‘Tails I win, heads you lose, which isn’t capitalism at all,’ he says. ‘There’s a moral hazard, that they are basically underwritten by the taxpayers. When they make profits, they go to the shareholders or the employees, and when they make losses or collapse, the shareholders and employees pay until they collapse, but the taxpayer pays as well, and that is a major problem.’ According to the National Audit Office, the scale of state backing for the banks peaked at an astonishing £1.162 trillion.11 But these banks were not made accountable to the people who had bailed them out: taxpayers did not have representatives sitting on their boards.


pages: 415 words: 125,089

Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein

Alan Greenspan, Albert Einstein, Alvin Roth, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, Bayesian statistics, behavioural economics, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buttonwood tree, buy and hold, capital asset pricing model, cognitive dissonance, computerized trading, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Lloyd's coffeehouse, endowment effect, experimental economics, fear of failure, Fellow of the Royal Society, Fermat's Last Theorem, financial deregulation, financial engineering, financial innovation, full employment, Great Leap Forward, index fund, invention of movable type, Isaac Newton, John Nash: game theory, John von Neumann, Kenneth Arrow, linear programming, loss aversion, Louis Bachelier, mental accounting, moral hazard, Myron Scholes, Nash equilibrium, Norman Macrae, Paul Samuelson, Philip Mirowski, Post-Keynesian economics, probability theory / Blaise Pascal / Pierre de Fermat, prudent man rule, random walk, Richard Thaler, Robert Shiller, Robert Solow, spectrum auction, statistical model, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas Bayes, trade route, transaction costs, tulip mania, Vanguard fund, zero-sum game

For example, the availability of deposit insurance to the depositors of savings and loan associations in the 1980s gave the owners a chance to win big if things went right and to lose little if things went wrong. When things finally went wrong, the taxpayers had to pay. Wherever insurance can be had, moral hazard-the temptation to cheat-will be present.* There is a huge gap between Laplace and Poincare on the one hand and Arrow and his contemporaries on the other. After the catastrophe of the First World War, the dream vanished that some day human beings would know everything they needed to know and that certainty would replace uncertainty.


pages: 316 words: 117,228

The Code of Capital: How the Law Creates Wealth and Inequality by Katharina Pistor

Andrei Shleifer, Asian financial crisis, asset-backed security, barriers to entry, Bear Stearns, Bernie Madoff, Big Tech, bilateral investment treaty, bitcoin, blockchain, Bretton Woods, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, colonial rule, conceptual framework, Corn Laws, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, digital rights, Donald Trump, double helix, driverless car, Edward Glaeser, Ethereum, ethereum blockchain, facts on the ground, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, full employment, global reserve currency, Gregor Mendel, Hernando de Soto, income inequality, initial coin offering, intangible asset, investor state dispute settlement, invisible hand, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, land reform, land tenure, London Interbank Offered Rate, Long Term Capital Management, means of production, money market fund, moral hazard, offshore financial centre, phenotype, Ponzi scheme, power law, price mechanism, price stability, profit maximization, railway mania, regulatory arbitrage, reserve currency, Robert Solow, Ronald Coase, Satoshi Nakamoto, secular stagnation, self-driving car, seminal paper, shareholder value, Silicon Valley, smart contracts, software patent, sovereign wealth fund, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, trade route, Tragedy of the Commons, transaction costs, Wolfgang Streeck

This has become largely a matter of private choice, a choice that is exercised more often than not by the current or prospective holders of capital themselves. There is nothing wrong with private choice—as long as it does not impose a burden on others or piggyback on state power to enforce that burden, as this smacks of moral hazard and inefficiencies.33 Yet, the practice of coding capital is largely exempt from the level of scrutiny that is applied to other forms of privileges or subsidies that are granted by the state. Law is taken as a given, as exogenous to the assets that are the harbingers of wealth; and enormous deference is given to the claim that one’s actions are “legal,” that they are based on rights.


pages: 516 words: 116,875

Greater: Britain After the Storm by Penny Mordaunt, Chris Lewis

"World Economic Forum" Davos, 2021 United States Capitol attack, 3D printing, accelerated depreciation, Ada Lovelace, Airbnb, banking crisis, battle of ideas, behavioural economics, Bernie Madoff, bitcoin, Black Lives Matter, blockchain, Bob Geldof, Boeing 747, Boris Johnson, Bretton Woods, Brexit referendum, British Empire, carbon footprint, Charles Babbage, collective bargaining, Corn Laws, corporate social responsibility, COVID-19, credit crunch, crowdsourcing, data is not the new oil, data is the new oil, David Attenborough, death from overwork, Deng Xiaoping, Diane Coyle, Donald Trump, Downton Abbey, driverless car, Elon Musk, en.wikipedia.org, experimental economics, failed state, fake news, Firefox, fixed income, full employment, gender pay gap, global pandemic, global supply chain, green new deal, happiness index / gross national happiness, high-speed rail, impact investing, Jeremy Corbyn, Khartoum Gordon, lateral thinking, Live Aid, lockdown, loss aversion, low skilled workers, microaggression, mittelstand, moral hazard, Neil Kinnock, Nelson Mandela, Ocado, off-the-grid, offshore financial centre, Panamax, Ponzi scheme, post-truth, quantitative easing, remote working, road to serfdom, Salesforce, Sheryl Sandberg, Skype, smart cities, social distancing, South China Sea, sovereign wealth fund, Steve Jobs, Steven Pinker, surveillance capitalism, transaction costs, transcontinental railway

For boardrooms not to recognise the ethical problem with tax avoidance is not just a failure of corporate compliance, it is corporate negligence in the face of a known threat. How many systemic failures and cries of ‘We just didn’t see it coming!’ do we need to hear before company boards faintly recognise their responsibility to seek out moral hazard, model it and codify their actions accordingly? There may come a time when only this type of audit trail will save their personal reputations. Another way of ensuring compliance with our taxation laws is for global government to seek to mitigate its worst effects. To do this will require cooperation among the largest capital democracies and it will take time.


pages: 1,073 words: 302,361

Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

"Friedman doctrine" OR "shareholder theory", "RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Alan Greenspan, asset-backed security, Bear Stearns, Bernie Madoff, Bob Litterman, book value, business cycle, buttonwood tree, buy and hold, collateralized debt obligation, Cornelius Vanderbilt, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, diversified portfolio, do well by doing good, fear of failure, financial engineering, financial innovation, fixed income, Ford paid five dollars a day, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, junk bonds, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, managed futures, margin call, market bubble, mega-rich, merger arbitrage, Michael Milken, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, proprietary trading, risk tolerance, Ronald Reagan, Saturday Night Live, short squeeze, South Sea Bubble, tail risk, time value of money, too big to fail, traveling salesman, two and twenty, value at risk, work culture , yield curve, Yogi Berra, zero-sum game

It is little wonder that the possibility of financial crisis with major economic consequences has again emerged as a major cause for concern.” In this remarkably prescient essay, Summers wrote about the need for a “lender-of-last resort”—the Federal Reserve—to step in during a financial crisis but warned that such non-market-based financial support could lead to “moral hazard” and a too-big-to-fail mentality. “In the presence of a Federal safety net, depositors will not scrutinize the loan portfolios of financial institutions,” he wrote. “This will encourage excess risk taking. The problem is magnified because a few aggressive institutions can put pressure on the rest by offering premium interest rates.

Goldman and Sachs Michigan Bell Telephone Microsoft Midway, Battle of Milken, Michael, 11.1, 18.1 milk of magnesia Miller, Anderson & Sherrerd Miller, Arjay Miller, Arthur Milliken Brothers Mills Factors Corporation, 6.1, 7.1, 7.2, 7.3 Mindich, Eric, 15.1, 18.1 Minsky, Hyman MIPS Mirror Group, 14.1, 14.2 Mississippi Missouri Pacific Railroad, 5.1, 5.2 Mnuchin, Robert, 5.1, 5.2, 7.1, 8.1, 17.1 Mnuchin, Steve Mondale, Walter, 9.1, 13.1, 13.2 Money (Cathcings), 1.1 Money Partners LP Montag, Thomas, prl.1, 19.1, 19.2, 19.3, 20.1, 20.2, 20.3, 20.4, 21.1, 22.1, 22.2, 22.3, 22.4, 22.5 Montgomery Securities Moody’s, 18.1, 18.2, 18.3, 21.1, 22.1, 22.2 Mooney, Shannon Moore, Michael Moot, Robert moral hazard Morgan, J. P., 1.1, 3.1 Morgan, W. Forbes Morgan Guaranty Trust Morgan Stanley, 4.1, 4.2, 5.1, 5.2, 9.1, 10.1, 12.1, 14.1, 15.1, 15.2, 16.1, 16.2, 17.1, 17.2, 17.3, 17.4, 17.5, 18.1, 18.2, 19.1, 20.1, 22.1 capital of IPO of, 10.1, 10.2 Jew hired at London office of TARP funds repaid by in turn to bank holding company valuation of, 16.1, 16.2 Morgenthau, Robert Morrison, David Mortara, Michael, 10.1, 15.1, 17.1, 18.1, 18.2 Mortgage Bankers Association mortgage-related securities, prl.1, 1.1, 2.1, 7.1, 10.1, 10.2, 12.1, 21.1, 22.1, 22.2 Bear Stearn’s losses on, prl.1, prl.2 “big short” of, see “big short” Blankfein’s defense of CDOs see collateralized debt obligations (CDOs) CMMs CMOs, 18.1, 18.2 deterioration of Goldman Sachs’s losses on, prl.1, prl.2, prl.3, 3.1 Massachusetts investigation of Paulson’s shorting of ratings of, prl.1, 18.1, 18.2, 19.1, 19.2, 19.3, 20.1, 20.2, 21.1, 21.2, 21.3, 21.4, 22.1, 23.1 residential (RMBS), 18.1, 19.1, 21.1, 21.2, 21.3, 22.1, 22.2, 22.3, 22.4 subprime, 18.1, 18.2, 18.3, 19.1, 19.2, 19.3, 20.1, 20.2, 20.3, 20.4, 20.5, 21.1, 21.2, 22.1, 22.2, 22.3, 22.4 tranches of, 18.1, 18.2, 18.3, 18.4, 18.5, 19.1, 19.2, 23.1 underwriting on Morton-Norwich Products, Inc.


pages: 589 words: 128,484

America's Bank: The Epic Struggle to Create the Federal Reserve by Roger Lowenstein

bank run, Bear Stearns, Berlin Wall, Bretton Woods, business cycle, capital controls, central bank independence, Charles Lindbergh, corporate governance, fiat currency, financial independence, full employment, Glass-Steagall Act, Ida Tarbell, Long Term Capital Management, low interest rates, Michael Milken, Money creation, moral hazard, off-the-grid, old-boy network, quantitative easing, The Wealth of Nations by Adam Smith, Upton Sinclair, walking around money

“Never before,” he noted, “had a Secretary declared that it was the place of the Treasury to intervene in banking operations outside of times of panic.” Evidently, he surmised, banks felt less need to keep their own reserve knowing that the Treasury was ready and eager to assist. This anticipated the “moral hazard” arguments against bailouts in the 2000s. “Outside relief in business, like outdoor charity,” Andrew concluded, “is apt to diminish the incentives to providence.” Andrew did not belittle the defects of the American system, or the need for reform, but he rejected “arbitrary and lawless interpretations” by an official “over whom Congress has little or no control.”


pages: 476 words: 144,288

1946: The Making of the Modern World by Victor Sebestyen

anti-communist, Ayatollah Khomeini, Berlin Wall, Bretton Woods, British Empire, centre right, classic study, clean water, colonial rule, disinformation, Etonian, European colonialism, Fall of the Berlin Wall, full employment, Herbert Marcuse, illegal immigration, imperial preference, Kickstarter, land reform, long peace, Mahatma Gandhi, mass immigration, Mikhail Gorbachev, Monroe Doctrine, moral hazard, operation paperclip

Britain had made similar, if not identical, pledges to two different groups of people and hoped neither would notice – or complain. It was a British official who first coined a phrase that became popular – ‘Palestine: the twice-promised land’. The writer Arthur Koestler was a passionate Zionist for much of his life, but he could see the moral hazard involved: ‘Here was one nation promising another nation the land of a third nation – an impossible notion.’ Entire books have been written about whether Britain was deliberately duplicitous, or simply careless, by issuing the Balfour Declaration – ‘His Majesty’s Government view with favour the establishment in Palestine of a national home for the Jewish people’ – while at the same time encouraging the Arabs to believe that they would be granted independence from the Ottomans.


pages: 430 words: 140,405

A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers by Lawrence G. Mcdonald, Patrick Robinson

"World Economic Forum" Davos, Alan Greenspan, AOL-Time Warner, asset-backed security, bank run, Bear Stearns, Black Monday: stock market crash in 1987, book value, business cycle, Carl Icahn, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, diversification, fixed income, Glass-Steagall Act, high net worth, hiring and firing, if you build it, they will come, it's over 9,000, junk bonds, London Interbank Offered Rate, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, naked short selling, negative equity, new economy, Ronald Reagan, Savings and loan crisis, short selling, sovereign wealth fund, value at risk

He actually gave Fuld orders, coming close to an outright demand, that Lehman get their act together. He wanted the place deleveraged in a big hurry, and he all but accused Fuld of dragging his feet. Hank was irritated that the massively leveraged Lehman, with Fuld’s blessing, was investing in leveraged hedge funds. It was leverage on leverage, with taxpayer funds as the backup. Moral hazard, anyone? He also advised they should consider seriously a secret but firm offer from the state-owned Korea Development Bank (KDB). It was believed to have been around $23 a share. Hank Paulson knew this offer had been on the table for several months and understood, doubtless from his Chinese friends, that it reflected a genuine desire on the part of KDB to own Lehman Brothers.


pages: 483 words: 141,836

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

Abraham Wald, activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, book value, business cycle, capital asset pricing model, carbon tax, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, currency risk, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, fail fast, fear index, financial engineering, financial innovation, global macro, illegal immigration, implied volatility, independent contractor, index fund, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market clearing, market fundamentalism, market microstructure, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, power law, pre–internet, proprietary trading, quantitative trading / quantitative finance, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stock buybacks, stocks for the long run, tail risk, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

If I were in charge, I’d publish the VaR numbers and allow public betting. That’s one of many reasons I’ll never be in charge. Anyway, having a few pieces of validated data is far better than having warehouses full of fiction. And, of course, regulators could stop bailing people out. Everyone hates bailouts because they are expensive and create moral hazard; that is, they encourage people to rely on the government to save them rather than taking precautions themselves. But there’s something even worse about them. They destroy the healthy process of evolution and creative destruction. They clog up the financial system with weeds that should have been extinct years ago.


pages: 444 words: 130,646

Twitter and Tear Gas: The Power and Fragility of Networked Protest by Zeynep Tufekci

"Hurricane Katrina" Superdome, 4chan, active measures, Affordable Care Act / Obamacare, algorithmic bias, AltaVista, Alvin Toffler, Andy Carvin, anti-communist, Bernie Sanders, Black Lives Matter, bread and circuses, British Empire, citizen journalism, collective bargaining, conceptual framework, context collapse, crowdsourcing, digital divide, disinformation, Donald Trump, Edward Snowden, end-to-end encryption, Evgeny Morozov, fake news, feminist movement, Ferguson, Missouri, Filter Bubble, Future Shock, gentrification, Howard Rheingold, income inequality, index card, interchangeable parts, invention of movable type, invention of writing, John Gilmore, John Perry Barlow, loose coupling, Mahatma Gandhi, Mark Zuckerberg, Menlo Park, Mikhail Gorbachev, moral hazard, moral panic, Naomi Klein, Network effects, new economy, obamacare, Occupy movement, offshore financial centre, pre–internet, race to the bottom, RAND corporation, real-name policy, ride hailing / ride sharing, Rosa Parks, sharing economy, Silicon Valley, Skype, Snapchat, Streisand effect, the strength of weak ties, The Structural Transformation of the Public Sphere, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, Twitter Arab Spring, We are the 99%, WikiLeaks, Yochai Benkler

Like many other movements in the twenty-first century, the Tea Party movement owes its beginning to a viral event, albeit one that began on cable television rather than via e-mail, like Occupy. On February 19, 2009, Rick Santelli, a commentator on CNBC, a cable channel devoted to business and stock news, went on a rant from the floor of the Chicago stock exchange about the “moral hazard” of providing government assistance to people who were behind in their mortgages. Santelli said that he wanted to organize a “Chicago Tea Party”—a reference to early protests against British taxation of colonists before the American Revolution. His lamentations went viral, and a protest was organized, mostly online, for April 15, 2009, also known as “tax day” in the United States, the day by which citizens are required to file their annual income tax forms.


pages: 462 words: 129,022

People, Power, and Profits: Progressive Capitalism for an Age of Discontent by Joseph E. Stiglitz

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, AlphaGo, antiwork, barriers to entry, basic income, battle of ideas, behavioural economics, Berlin Wall, Bernie Madoff, Bernie Sanders, Big Tech, business cycle, Cambridge Analytica, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, carried interest, central bank independence, clean water, collective bargaining, company town, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crony capitalism, DeepMind, deglobalization, deindustrialization, disinformation, disintermediation, diversified portfolio, Donald Trump, driverless car, Edward Snowden, Elon Musk, Erik Brynjolfsson, fake news, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, Firefox, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, gig economy, Glass-Steagall Act, global macro, global supply chain, greed is good, green new deal, income inequality, information asymmetry, invisible hand, Isaac Newton, Jean Tirole, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John von Neumann, Joseph Schumpeter, labor-force participation, late fees, low interest rates, low skilled workers, Mark Zuckerberg, market fundamentalism, mass incarceration, meta-analysis, minimum wage unemployment, moral hazard, new economy, New Urbanism, obamacare, opioid epidemic / opioid crisis, patent troll, Paul Samuelson, pension reform, Peter Thiel, postindustrial economy, price discrimination, principal–agent problem, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, Richard Thaler, Robert Bork, Robert Gordon, Robert Mercer, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, search costs, secular stagnation, self-driving car, shareholder value, Shoshana Zuboff, Silicon Valley, Simon Kuznets, South China Sea, sovereign wealth fund, speech recognition, Steve Bannon, Steve Jobs, surveillance capitalism, TED Talk, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, two-sided market, universal basic income, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, War on Poverty, working-age population, Yochai Benkler

(Cambridge, MA: MIT Press, 1994). 6.Modern economic theory has explained many of the market failures. Those in insurance markets are often related to asymmetries of information, problems of adverse selection (where there are important differences among individuals that firms, whether as employer, lender, or insurer, cannot easily ascertain), and moral hazard (where, for instance, the provision of insurance leads individuals to act in ways that expose the insurance company to more risk, but which the insurance firm cannot monitor and therefore cannot control). The government can avoid, for instance, some of the adverse selection problems because through Social Security it is insuring the entire population. 7.Private programs providing essentially the same services as Medicare have cost as much as 20 percent more.


Adam Smith: Father of Economics by Jesse Norman

active measures, Alan Greenspan, Andrei Shleifer, balance sheet recession, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Berlin Wall, Black Swan, Branko Milanovic, Bretton Woods, British Empire, Broken windows theory, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, centre right, cognitive dissonance, collateralized debt obligation, colonial exploitation, Corn Laws, Cornelius Vanderbilt, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, David Ricardo: comparative advantage, deindustrialization, electricity market, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Fellow of the Royal Society, financial engineering, financial intermediation, frictionless, frictionless market, future of work, George Akerlof, Glass-Steagall Act, Hyman Minsky, income inequality, incomplete markets, information asymmetry, intangible asset, invention of the telescope, invisible hand, Isaac Newton, Jean Tirole, John Nash: game theory, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, lateral thinking, loss aversion, low interest rates, market bubble, market fundamentalism, Martin Wolf, means of production, mirror neurons, money market fund, Mont Pelerin Society, moral hazard, moral panic, Naomi Klein, negative equity, Network effects, new economy, non-tariff barriers, Northern Rock, Pareto efficiency, Paul Samuelson, Peter Thiel, Philip Mirowski, price mechanism, principal–agent problem, profit maximization, public intellectual, purchasing power parity, random walk, rent-seeking, Richard Thaler, Robert Shiller, Robert Solow, Ronald Coase, scientific worldview, seigniorage, Socratic dialogue, South Sea Bubble, special economic zone, speech recognition, Steven Pinker, The Chicago School, The Myth of the Rational Market, The Nature of the Firm, The Rise and Fall of American Growth, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, time value of money, transaction costs, transfer pricing, Veblen good, Vilfredo Pareto, Washington Consensus, working poor, zero-sum game

, Bank of England/London Business School 2016 Increase in bank regulation and regulators: Andy Haldane, ‘The Dog and the Frisbee’, Federal Reserve Bank of Kansas City 366th Economic Policy Symposium, Jackson Hole, Wyoming, 31 August 2012 Effects of large financial sectors: Jean-Louis Arcand, Enrico Berkes and Ugo Panizza, ‘Too Much Finance?’, IMF Working Paper 2012 Implicit subsidy to banks: IMF, Global Financial Stability Report, April 2014; Andy Haldane, ‘Who Owns a Company?’, Speech, Bank of England 2015 Lobbying and moral hazard: Deniz Igan, Prachi Mishra and Thierry Tressel, ‘A Fistful of Dollars: Lobbying and the Financial Crisis’, IMF Working Paper 2009 Bank employee rents and effects on inequality: Thomas Philippon and Ariell Reshef, ‘Wages and Human Capital in the U.S. Financial Industry: 1909–2006’, NBER Working Paper 14644, 2009; Brian Bell and John Van Reenen, ‘Bankers’ Pay and Extreme Wage Inequality in the UK’, CEPR 2010 Banking culture and honesty: in one study, bank employees were not on average shown to be less honest than other employees.


The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good by William Easterly

"World Economic Forum" Davos, airport security, anti-communist, Asian financial crisis, bank run, banking crisis, Bob Geldof, Bretton Woods, British Empire, call centre, clean water, colonial exploitation, colonial rule, Edward Glaeser, end world poverty, European colonialism, failed state, farmers can use mobile phones to check market prices, George Akerlof, Gunnar Myrdal, guns versus butter model, Hernando de Soto, income inequality, income per capita, Indoor air pollution, intentional community, invisible hand, Kenneth Rogoff, laissez-faire capitalism, land bank, land reform, land tenure, Live Aid, microcredit, moral hazard, Naomi Klein, Nelson Mandela, publication bias, purchasing power parity, randomized controlled trial, Ronald Reagan, Scramble for Africa, structural adjustment programs, The Fortune at the Bottom of the Pyramid, the scientific method, The Wealth of Nations by Adam Smith, Tragedy of the Commons, transaction costs, TSMC, War on Poverty, Xiaogang Anhui farmers

The IMF and the World Bank kept making new loans to repay old loans, even though countries were having ever-increasing difficulties at repayment. At this point, the ever-escalating degree of debt forgiveness has destroyed low-income debt as a believable instrument to finance anything. The borrowers have little incentive to repay when they see the debts periodically forgiven (what economists call “moral hazard”). Calling a loan to the poorest countries a “loan” has become ever more fictional. The World Bank, which is an aid agency, should just give the poorest countries grants, not loans (this was one of the better ideas of the Bush administration on foreign aid). The IMF, which is not supposed to be an aid agency, should get out of the business of loaning money to the poorest, least creditworthy countries altogether.


pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

Albert Einstein, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bear Stearns, Bernie Madoff, Black Swan, bond market vigilante , book value, Bretton Woods, BRICs, British Empire, business cycle, business process, buy and hold, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, commodity super cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, equity risk premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, global macro, Greenspan put, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, inverted yield curve, invisible hand, junk bonds, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, market microstructure, Minsky moment, moral hazard, Myron Scholes, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, proprietary trading, purchasing power parity, quantitative easing, random walk, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, SoftBank, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, stocks for the long term, survivorship bias, tail risk, The Great Moderation, Thomas Bayes, time value of money, too big to fail, Tragedy of the Commons, transaction costs, two and twenty, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

A better longer-term solution for the world is probably more than one reserve currency. But unless the U.S. really mismanages things from here, the dollar will remain the world’s number one reserve currency 5 and 10 years down the road. It just might not enjoy such a wide margin of dominance in the future. Is this current bailout going to create the mother of all moral hazards? Are the actions of the Bernanke Fed a highly levered version of the Greenspan put? The idea that central banks can fine-tune everything, that they have perfected their game such that risk premia should be much lower, has been proven false. Perhaps it was exactly the other way around: central banks lowered risk premia enough to spark a bubble in credit markets (see box).


pages: 515 words: 132,295

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

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, Alan Greenspan, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, Bear Stearns, behavioural economics, Big Tech, bonus culture, Bretton Woods, British Empire, business cycle, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, data science, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, electricity market, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial engineering, financial intermediation, Ford Model T, Frederick Winslow Taylor, George Akerlof, gig economy, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Greenspan put, guns versus butter model, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Bogle, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, London Whale, Long Term Capital Management, low interest rates, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, proprietary trading, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Ronald Reagan, Satyajit Das, Savings and loan crisis, scientific management, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stock buybacks, subprime mortgage crisis, technology bubble, TED Talk, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, Tragedy of the Commons, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, vertical integration, zero-sum game

They envisioned a more concentrated national banking system underwritten by a new system of deposit insurance and a central bank—the Federal Reserve—that would play the role of the national lender of last resort. It was a structure that made sense at the time. Yet it was also in some ways the beginning of the moral hazard problem that we all know so well today. All these legal changes fed into the Too Big to Fail financial industry we have now, one in which gains are privatized but losses are socialized.33 Indeed, the incorporation of many American investment banks in the 1980s and ’90s allowed them to grow the kinds of huge balance sheets that were a prerequisite to becoming serious players in new domains such as the derivatives market.


pages: 422 words: 131,666

Life Inc.: How the World Became a Corporation and How to Take It Back by Douglas Rushkoff

Abraham Maslow, Adam Curtis, addicted to oil, affirmative action, Alan Greenspan, Amazon Mechanical Turk, An Inconvenient Truth, anti-globalists, AOL-Time Warner, banks create money, Bear Stearns, benefit corporation, big-box store, Bretton Woods, car-free, Charles Lindbergh, colonial exploitation, Community Supported Agriculture, complexity theory, computer age, congestion pricing, corporate governance, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, death of newspapers, digital divide, don't be evil, Donald Trump, double entry bookkeeping, easy for humans, difficult for computers, financial innovation, Firefox, full employment, General Motors Futurama, gentrification, Glass-Steagall Act, global village, Google Earth, greed is good, Herbert Marcuse, Howard Rheingold, income per capita, invention of the printing press, invisible hand, Jane Jacobs, John Nash: game theory, joint-stock company, Kevin Kelly, Kickstarter, laissez-faire capitalism, loss aversion, market bubble, market design, Marshall McLuhan, Milgram experiment, military-industrial complex, moral hazard, multilevel marketing, mutually assured destruction, Naomi Klein, negative equity, new economy, New Urbanism, Norbert Wiener, peak oil, peer-to-peer, place-making, placebo effect, planned obsolescence, Ponzi scheme, price mechanism, price stability, principal–agent problem, private military company, profit maximization, profit motive, prosperity theology / prosperity gospel / gospel of success, public intellectual, race to the bottom, RAND corporation, rent-seeking, RFID, road to serfdom, Ronald Reagan, scientific management, short selling, Silicon Valley, Simon Kuznets, social software, Steve Jobs, Telecommunications Act of 1996, telemarketer, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, trade route, trickle-down economics, union organizing, urban decay, urban planning, urban renewal, Vannevar Bush, vertical integration, Victor Gruen, white flight, working poor, Works Progress Administration, Y2K, young professional, zero-sum game

Sufficiently disconnected from the remains of a shared human culture, the amateur marketers believe that they are creating opportunities for people to engage with one another once again. The products they’re pitching are just the excuse to start up a good conversation. Of the scores of people I’ve spoken to who engage in these campaigns, none of them see any moral hazard. Some advocate only the products they genuinely believe to be beneficial, while others simply feel “empowered” by their ability to influence their peers’ purchasing decisions. The consumer chosen to be a product spokesperson gets to step into the role that only a trusted corporation could play before.


pages: 444 words: 127,259

Super Pumped: The Battle for Uber by Mike Isaac

"Susan Fowler" uber, "World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Airbnb, Albert Einstein, always be closing, Amazon Web Services, Andy Kessler, autonomous vehicles, Ayatollah Khomeini, barriers to entry, Bay Area Rapid Transit, Benchmark Capital, Big Tech, Burning Man, call centre, Cambridge Analytica, Chris Urmson, Chuck Templeton: OpenTable:, citizen journalism, Clayton Christensen, cloud computing, corporate governance, creative destruction, data science, Didi Chuxing, don't be evil, Donald Trump, driverless car, Elon Musk, end-to-end encryption, fake news, family office, gig economy, Google Glasses, Google X / Alphabet X, Greyball, Hacker News, high net worth, hockey-stick growth, hustle culture, impact investing, information security, Jeff Bezos, John Markoff, John Zimmer (Lyft cofounder), Kevin Roose, Kickstarter, Larry Ellison, lolcat, Lyft, Marc Andreessen, Marc Benioff, Mark Zuckerberg, Masayoshi Son, mass immigration, Menlo Park, Mitch Kapor, money market fund, moral hazard, move fast and break things, Network effects, new economy, off grid, peer-to-peer, pets.com, Richard Florida, ride hailing / ride sharing, Salesforce, Sand Hill Road, self-driving car, selling pickaxes during a gold rush, shareholder value, Shenzhen special economic zone , Sheryl Sandberg, side hustle, side project, Silicon Valley, Silicon Valley startup, skunkworks, Snapchat, SoftBank, software as a service, software is eating the world, South China Sea, South of Market, San Francisco, sovereign wealth fund, special economic zone, Steve Bannon, Steve Jobs, stock buybacks, super pumped, TaskRabbit, tech bro, tech worker, the payments system, Tim Cook: Apple, Travis Kalanick, Uber and Lyft, Uber for X, uber lyft, ubercab, union organizing, upwardly mobile, Vision Fund, WeWork, Y Combinator

Uber noticed that the rate of safety incidents spiked after the company began the Xchange leasing program. They later figured out that many of the Xchange leasing drivers—those with poor or nonexistent credit histories—were the ones responsible for these incidents, which ranged from speeding tickets to sexual assault. The managers had created a moral hazard, indirectly causing pain for thousands, and potentially triggering a public relations and legal nightmare. Further, car dealerships were pushing these marginal drivers into more expensive leasing options, thereby lowering drivers’ opportunity to profit from their work. And after driving the cars around the clock, drivers were returning the vehicles in far worse condition than when they began the lease.


pages: 611 words: 130,419

Narrative Economics: How Stories Go Viral and Drive Major Economic Events by Robert J. Shiller

agricultural Revolution, Alan Greenspan, Albert Einstein, algorithmic trading, Andrei Shleifer, autism spectrum disorder, autonomous vehicles, bank run, banking crisis, basic income, behavioural economics, bitcoin, blockchain, business cycle, butterfly effect, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, central bank independence, collective bargaining, computerized trading, corporate raider, correlation does not imply causation, cryptocurrency, Daniel Kahneman / Amos Tversky, debt deflation, digital divide, disintermediation, Donald Trump, driverless car, Edmond Halley, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, fake news, financial engineering, Ford Model T, full employment, George Akerlof, germ theory of disease, German hyperinflation, Great Leap Forward, Gunnar Myrdal, Gödel, Escher, Bach, Hacker Ethic, implied volatility, income inequality, inflation targeting, initial coin offering, invention of radio, invention of the telegraph, Jean Tirole, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, litecoin, low interest rates, machine translation, market bubble, Modern Monetary Theory, money market fund, moral hazard, Northern Rock, nudge unit, Own Your Own Home, Paul Samuelson, Philip Mirowski, plutocrats, Ponzi scheme, public intellectual, publish or perish, random walk, Richard Thaler, Robert Shiller, Ronald Reagan, Rubik’s Cube, Satoshi Nakamoto, secular stagnation, shareholder value, Silicon Valley, speech recognition, Steve Jobs, Steven Pinker, stochastic process, stocks for the long run, superstar cities, The Rise and Fall of American Growth, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, traveling salesman, trickle-down economics, tulip mania, universal basic income, Watson beat the top human players on Jeopardy!, We are the 99%, yellow journalism, yield curve, Yom Kippur War

In Peter Stachura, ed., Unemployment and the Great Depression in Weimar Germany, 187–208. London: Palgrave Macmillan. Fama, Eugene F., and Kenneth R. French. 1993. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics 33(1):3–56. Fang, Hanming, and Giuseppe Moscarini. 2005. “Morale Hazard.” Journal of Monetary Economics 52(4):749–77. Farmer, Roger E. A. 1999. Macroeconomics of Self-Fulfilling Prophecies. Cambridge, MA: MIT Press. Farnam, Henry W. 1912. “The Economic Utilization of History: Annual Address of the President.” American Economic Review 2(1):5–16. Fearon, James, and David Laitin. 2003.


pages: 563 words: 136,190

The Next Shift: The Fall of Industry and the Rise of Health Care in Rust Belt America by Gabriel Winant

affirmative action, Affordable Care Act / Obamacare, anti-communist, antiwork, blue-collar work, business cycle, Capital in the Twenty-First Century by Thomas Piketty, classic study, clean water, collective bargaining, company town, coronavirus, COVID-19, creative destruction, deindustrialization, desegregation, deskilling, emotional labour, employer provided health coverage, Erik Brynjolfsson, Ford paid five dollars a day, full employment, future of work, ghettoisation, independent contractor, invisible hand, Kitchen Debate, labor-force participation, longitudinal study, low skilled workers, mandatory minimum, manufacturing employment, mass incarceration, MITM: man-in-the-middle, moral hazard, new economy, New Urbanism, obamacare, opioid epidemic / opioid crisis, pink-collar, post-industrial society, post-work, postindustrial economy, price stability, RAND corporation, Ronald Reagan, Second Machine Age, secular stagnation, the built environment, union organizing, upwardly mobile, urban renewal, vertical integration, War on Poverty, white flight, Wolfgang Streeck, women in the workforce, work culture , working poor

Cornford (Westport, CT: Greenwood Press, 1995), 69–87. See also Robyn Muncy, “Coal-Fired Reforms: Social Citizenship, Dissident Miners, and the Great Society,” Journal of American History 96, no. 1 (June 2009), 72–98. 14. Albert, A Practical Vision, 73. See Carol A. Heimer, Reactive Risk and Rational Action: Managing Moral Hazard in Insurance Contracts (Berkeley: University of California Press, 1985). On community rating, see Klein, For All These Rights, 214, 227; Gottschalk, The Shadow Welfare State, 40–41, 57–58. 15. Albert, A Practical Vision, 75; “Blue Cross Enrollment Affected by Steel: Collective Bargaining and Blue Cross,” Blue Cross Bulletin 1, no. 8 (November 1959), p. 1, box 104, folder 1200, ISFP. 16.


pages: 420 words: 135,569

Imaginable: How to See the Future Coming and Feel Ready for Anything―Even Things That Seem Impossible Today by Jane McGonigal

2021 United States Capitol attack, Airbnb, airport security, Alvin Toffler, augmented reality, autism spectrum disorder, autonomous vehicles, availability heuristic, basic income, biodiversity loss, bitcoin, Black Lives Matter, blockchain, circular economy, clean water, climate change refugee, cognitive bias, cognitive dissonance, Community Supported Agriculture, coronavirus, COVID-19, CRISPR, cryptocurrency, data science, decarbonisation, digital divide, disinformation, Donald Trump, drone strike, Elon Musk, fake news, fiat currency, future of work, Future Shock, game design, George Floyd, global pandemic, global supply chain, Greta Thunberg, income inequality, index card, Internet of things, Jane Jacobs, Jeff Bezos, Kickstarter, labor-force participation, lockdown, longitudinal study, Mason jar, mass immigration, meta-analysis, microbiome, Minecraft, moral hazard, open borders, pattern recognition, place-making, plant based meat, post-truth, QAnon, QR code, remote working, RFID, risk tolerance, School Strike for Climate, Search for Extraterrestrial Intelligence, self-driving car, Silicon Valley, Silicon Valley startup, Snapchat, social distancing, stem cell, TED Talk, telepresence, telepresence robot, The future is already here, TikTok, traumatic brain injury, universal basic income, women in the workforce, work culture , Y Combinator

It’s another clear signal that SRM is no longer a radical idea but rather a respectable one with career-building potential.9 That said, governments are just barely beginning to try to figure out how to regulate and coordinate geoengineering efforts. In 2015, the UN Convention on Biological Diversity established a moratorium on geoengineering activities, with 196 countries signing on. It cited the moral hazard of one country acting unilaterally to change the planet’s climate, as well as potential risks like unintended health and environmental impacts. Crucially, SRM isn’t the kind of action you can just “undo” if you don’t like the results. But the moratorium made an exception for “small scale scientific research studies that . . . are justified by the need to gather specific scientific data and are subject to a thorough prior assessment of the potential impacts on the environment.”10 The first such study almost got underway in 2020, when Harvard University scientists working on the Stratospheric Controlled Perturbation Experiment planned to launch a test balloon over the northernmost town in Sweden—the kind of balloon that would be needed to inject particles into the atmosphere.


pages: 561 words: 138,158

Shutdown: How COVID Shook the World's Economy by Adam Tooze

2021 United States Capitol attack, air freight, algorithmic trading, Anthropocene, Asian financial crisis, asset-backed security, Ayatollah Khomeini, bank run, banking crisis, Basel III, basic income, Ben Bernanke: helicopter money, Benchmark Capital, Berlin Wall, Bernie Sanders, Big Tech, bitcoin, Black Lives Matter, Black Monday: stock market crash in 1987, blue-collar work, Bob Geldof, bond market vigilante , Boris Johnson, Bretton Woods, Brexit referendum, business cycle, business process, business process outsourcing, buy and hold, call centre, capital controls, central bank independence, centre right, clean water, cognitive dissonance, contact tracing, contact tracing app, coronavirus, COVID-19, credit crunch, Credit Default Swap, cryptocurrency, currency manipulation / currency intervention, currency peg, currency risk, decarbonisation, deindustrialization, Donald Trump, Elon Musk, energy transition, eurozone crisis, facts on the ground, failed state, fake news, Fall of the Berlin Wall, fear index, financial engineering, fixed income, floating exchange rates, friendly fire, George Floyd, gig economy, global pandemic, global supply chain, green new deal, high-speed rail, housing crisis, income inequality, inflation targeting, invisible hand, It's morning again in America, Jeremy Corbyn, junk bonds, light touch regulation, lockdown, low interest rates, margin call, Martin Wolf, mass immigration, mass incarceration, megacity, megaproject, middle-income trap, Mikhail Gorbachev, Modern Monetary Theory, moral hazard, oil shale / tar sands, Overton Window, Paris climate accords, Pearl River Delta, planetary scale, Potemkin village, price stability, Productivity paradox, purchasing power parity, QR code, quantitative easing, remote working, reserve currency, reshoring, Robinhood: mobile stock trading app, Ronald Reagan, secular stagnation, shareholder value, Silicon Valley, six sigma, social distancing, South China Sea, special drawing rights, stock buybacks, tail risk, TikTok, too big to fail, TSMC, universal basic income, Washington Consensus, women in the workforce, yield curve

In Angela Merkel’s final Grand Coalition government, the conservative war horse Wolfgang Schäuble was replaced as finance minister by Olaf Scholz, a pragmatic Social Democrat.12 Already in late February he came out in favor of suspending Germany’s constitutionally enforced budget balance, so as to enable Germany’s regional governments to respond to the crisis.13 On March 25, at the same time as the American Congress voted its historic package, the Bundestag approved a 123 billion euro supplementary budget, which together with loan guarantees provided a 750 billion euro backstop to the German economy.14 This was followed in June by a second 130 billion euro package aimed at pushing public investment and unburdening the budgets of local government, freeing up resources to improve local infrastructure.15 Not only did this provide stimulus to Europe’s largest economy, but Berlin was giving a green light to the rest of Europe to follow suit. When Brussels suspended the budget rules that constrained the deficits of all the euro area members, Berlin raised no objections. The virus silenced moral hazard arguments against subsidies and welfare spending. No business or government could reasonably be blamed for bringing the pandemic on itself. When the Dutch finance minister demanded to know why the balance sheets of some European governments were not stronger ahead of the outbreak, his remarks were dismissed as repugnant by Portugal’s prime minister, António Costa.16 Covid was not a normal economic event for which it was reasonable to make long-term budgetary preparations.


America Right or Wrong: An Anatomy of American Nationalism by Anatol Lieven

"World Economic Forum" Davos, American ideology, British Empire, centre right, cognitive dissonance, colonial rule, cuban missile crisis, desegregation, driverless car, European colonialism, failed state, Francis Fukuyama: the end of history, full employment, Gunnar Myrdal, illegal immigration, income inequality, laissez-faire capitalism, mass immigration, Mikhail Gorbachev, military-industrial complex, millennium bug, mittelstand, Monroe Doctrine, moral hazard, moral panic, new economy, Norman Mailer, oil shock, open immigration, Ralph Waldo Emerson, Robert Bork, Ronald Reagan, Seymour Hersh, Thomas L Friedman, Timothy McVeigh, World Values Survey, Y2K

To examine their own nationalism in this way, it will however be necessary for Americans to learn from the often terrible example of other nationalisms in modern history and around the world. Doing so will require an ability to step outside American national myths and look at the nation with detachment, not as an exceptional city on a hill, but as a mortal nation among other nations, better than most, no doubt, but also subject to the moral hazards, temptations and crimes to which many peoples have been exposed.9 The disastrous outcomes that I have sketched are certainly not inevitable, given the tremendous resilience and dynamism of American society, American values and the American democratic tradition; but preventing them will require not just thought but serious action by the U.S. political classes.


pages: 577 words: 149,554

The Problem of Political Authority: An Examination of the Right to Coerce and the Duty to Obey by Michael Huemer

Cass Sunstein, Chelsea Manning, cognitive dissonance, cuban missile crisis, Daniel Kahneman / Amos Tversky, en.wikipedia.org, Eratosthenes, experimental subject, framing effect, Garrett Hardin, Gini coefficient, illegal immigration, impulse control, Isaac Newton, Julian Assange, laissez-faire capitalism, land bank, Machinery of Freedom by David Friedman, Milgram experiment, moral hazard, Phillip Zimbardo, profit maximization, profit motive, Ralph Nader, RAND corporation, rent-seeking, Ronald Coase, Stanford prison experiment, systematic bias, The Wealth of Nations by Adam Smith, Tyler Cowen, unbiased observer, uranium enrichment, WikiLeaks

It rests on a very widely accepted and plausible economic principle, that of the diminishing marginal utility of wealth. There are also a number of prima facie plausible arguments for the opposite conclusion. Charles Murray, the most influential critic of government antipoverty programs, argues that these programs create a moral hazard problem.16 They lower the costs of or create benefits for certain social conditions, such as unemployment and out-of-wedlock pregnancy. This lowers people’s aversion to those conditions, leading more people to behave in ways more likely to lead to those conditions. Rather than helping the poor get on their feet, Murray contends, the government programs create a cycle of dependency, making it easier in the short term to engage in behaviors that are self-destructive in the long term.


pages: 482 words: 149,351

The Finance Curse: How Global Finance Is Making Us All Poorer by Nicholas Shaxson

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Airbnb, airline deregulation, Alan Greenspan, anti-communist, bank run, banking crisis, Basel III, Bear Stearns, benefit corporation, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, Bretton Woods, British Empire, business climate, business cycle, capital controls, carried interest, Cass Sunstein, Celtic Tiger, central bank independence, centre right, Clayton Christensen, cloud computing, corporate governance, corporate raider, creative destruction, Credit Default Swap, cross-subsidies, David Ricardo: comparative advantage, demographic dividend, Deng Xiaoping, desegregation, Donald Trump, Etonian, export processing zone, failed state, fake news, falling living standards, family office, financial deregulation, financial engineering, financial innovation, forensic accounting, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, Glass-Steagall Act, global supply chain, Global Witness, high net worth, Ida Tarbell, income inequality, index fund, invisible hand, Jeff Bezos, junk bonds, Kickstarter, land value tax, late capitalism, light touch regulation, London Whale, Long Term Capital Management, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, megaproject, Michael Milken, Money creation, Mont Pelerin Society, moral hazard, neoliberal agenda, Network effects, new economy, Northern Rock, offshore financial centre, old-boy network, out of africa, Paul Samuelson, plutocrats, Ponzi scheme, price mechanism, proprietary trading, purchasing power parity, pushing on a string, race to the bottom, regulatory arbitrage, rent-seeking, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, Savings and loan crisis, seminal paper, shareholder value, sharing economy, Silicon Valley, Skype, smart grid, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, special economic zone, Steve Ballmer, Steve Jobs, stock buybacks, Suez crisis 1956, The Chicago School, Thorstein Veblen, too big to fail, Tragedy of the Commons, transfer pricing, two and twenty, vertical integration, Wayback Machine, wealth creators, white picket fence, women in the workforce, zero-sum game

Yet the cutbacks have hit the poorest councils hardest: for instance, Knowsley and Liverpool, two of the most deprived parts of the country, saw council spending cut by around £400 per inhabitant between 2000 and 2016, while Wokingham and Elmbridge, two of the wealthiest, had theirs cut by £2.19 and £8.14 respectively.13 Adam Leaver, professor of accounting and society at Sheffield University, sums up the geographical impact of the boom years and the crisis: ‘This quiet cross-subsidy from north and west to south-east has been running unnoticed for a long time,’ resulting in ‘a kind of regional moral hazard: the metropolitanisation of gains, and the nationalisation of losses.’ One major route for this flow is the stock market. Many people believe a stock market’s main function is to channel investors’ money to companies – to invest in productive things – but the shareholder value revolution that I described in the last chapter has turned this on its head, as companies increasingly prioritise channelling their profits not into investment but into buying back their own shares – thereby boosting the share price and with it shareholders’ wealth and company executives’ stock options – or buying other firms in monopolising mergers and acquisitions.


pages: 524 words: 146,798

Anarchy State and Utopia by Robert Nozick

distributed generation, Herbert Marcuse, invisible hand, Jane Jacobs, Kenneth Arrow, laissez-faire capitalism, Machinery of Freedom by David Friedman, means of production, Menlo Park, moral hazard, night-watchman state, Norman Mailer, Pareto efficiency, price discrimination, prisoner's dilemma, rent control, risk tolerance, Ronald Coase, school vouchers, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, Yogi Berra

bu Such risks could not be insured against for every project. There will be different estimates of these risks; and once having insured against them there will be less incentive to act fully to bring about the favorable alternative. So an insurer would have to watch over or monitor one’s activities to avoid what is termed the “moral hazard.” See Kenneth Arrow, Essays in the Theory of Risk-Bearing (Chicago: Markham, 1971). Alchian and Demsetz, American Economic Review (1972), pp. 777-795, discuss monitoring activities; they arrive at the subject through considering problems about estimating marginal product in joint activities through monitoring input, rather than through considerations about risk and insurance.


pages: 590 words: 152,595

Army of None: Autonomous Weapons and the Future of War by Paul Scharre

"World Economic Forum" Davos, active measures, Air France Flight 447, air gap, algorithmic trading, AlphaGo, Apollo 13, artificial general intelligence, augmented reality, automated trading system, autonomous vehicles, basic income, Black Monday: stock market crash in 1987, brain emulation, Brian Krebs, cognitive bias, computer vision, cuban missile crisis, dark matter, DARPA: Urban Challenge, data science, deep learning, DeepMind, DevOps, Dr. Strangelove, drone strike, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, facts on the ground, fail fast, fault tolerance, Flash crash, Freestyle chess, friendly fire, Herman Kahn, IFF: identification friend or foe, ImageNet competition, information security, Internet of things, Jeff Hawkins, Johann Wolfgang von Goethe, John Markoff, Kevin Kelly, Korean Air Lines Flight 007, Loebner Prize, loose coupling, Mark Zuckerberg, military-industrial complex, moral hazard, move 37, mutually assured destruction, Nate Silver, Nick Bostrom, PalmPilot, paperclip maximiser, pattern recognition, Rodney Brooks, Rubik’s Cube, self-driving car, sensor fusion, South China Sea, speech recognition, Stanislav Petrov, Stephen Hawking, Steve Ballmer, Steve Wozniak, Strategic Defense Initiative, Stuxnet, superintelligent machines, Tesla Model S, The Signal and the Noise by Nate Silver, theory of mind, Turing test, Tyler Cowen, universal basic income, Valery Gerasimov, Wall-E, warehouse robotics, William Langewiesche, Y2K, zero day

Air Force, has argued that for those concerned about an accountability gap, the “issue is not with autonomous weapons, it is with the fundamental precepts of criminal law.” Bonnie Docherty also said she thought accountability was important to deter future harmful acts. While accidental killings are unintentional by definition and thus something that cannot be deterred, an accountability gap could create an insidious danger of moral hazard. If those who launch autonomous weapons do not believe they are accountable for the killing that results, they could become careless, launching the weapon into places where perhaps its performance was not assured. In theory, compliance with IHL should prevent this kind of reckless behavior. In practice, the fuzziness of principles like precautions in attack and the fact that machines would be doing the targeting would increasingly separate humans from killing on the battlefield.


The-General-Theory-of-Employment-Interest-and-Money by John Maynard Keynes

bank run, behavioural economics, business cycle, collective bargaining, declining real wages, delayed gratification, full employment, invisible hand, laissez-faire capitalism, low interest rates, marginal employment, means of production, moral hazard, Paul Samuelson, price stability, profit motive, quantitative easing, secular stagnation, The Wealth of Nations by Adam Smith, We are all Keynesians now, working-age population

If a man is venturing his own money, this is the only risk which is relevant. But where a system of borrowing and lending exists, by which I mean the granting of loans with a margin of real or personal security, a second type of risk is relevant which we may call the lender’s risk. This may be due either to moral hazard, i.e. voluntary default or other means of escape, possibly lawful, from the fulfilment of the obligation, or to the possible insufficiency of the margin of security, i.e. involuntary default due to the disappointment of expectation. A third source of risk might be added, namely, a possible adverse change in the value of the monetary standard which renders a money-loan to this extent less secure than a real asset; though all or most of this should be already reflected, and therefore absorbed, in the price of durable real assets.


pages: 517 words: 147,591

Small Wars, Big Data: The Information Revolution in Modern Conflict by Eli Berman, Joseph H. Felter, Jacob N. Shapiro, Vestal Mcintyre

basic income, call centre, centre right, classic study, clean water, confounding variable, crowdsourcing, data science, demand response, drone strike, experimental economics, failed state, George Akerlof, Google Earth, guns versus butter model, HESCO bastion, income inequality, income per capita, information asymmetry, Internet of things, iterative process, land reform, mandatory minimum, minimum wage unemployment, moral hazard, natural language processing, operational security, RAND corporation, randomized controlled trial, Ronald Reagan, school vouchers, statistical model, the scientific method, trade route, Twitter Arab Spring, unemployed young men, WikiLeaks, World Values Survey

Shapiro, The Terrorist’s Dilemma: Managing Violent Covert Organizations (Princeton: Princeton University Press, 2013); Jacob N. Shapiro and David A. Siegel, “Underfunding in Terrorist Organizations,” International Studies Quarterly 51, no. 2 (2007): 405–29; Jacob N. Shapiro and David A. Siegel, “Moral Hazard, Discipline, and the Management of Terrorist Organizations,” World Politics 64, no. 1 (2012): 39–78. 6. Clinton Watts, Jacob N. Shapiro, and Vahid Brown, Al-Qa’ida’s (Mis)Adventures in the Horn of Africa (West Point, NY: Combating Terrorism Center, 2007). 7. Joseph Felter and Brian Fishman, Al-Qa’ida’s Foreign Fighters in Iraq (West Point, NY: Combating Terrorism Center, 2007).


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

3D printing, Airbnb, Alan Greenspan, 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, book value, Boris Johnson, Bretton Woods, BRICs, British Empire, business cycle, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, clean tech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Crossrail, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, disruptive innovation, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, financial engineering, first-past-the-post, Ford Model T, forward guidance, full employment, Gini coefficient, global supply chain, Great Leap Forward, Growth in a Time of Debt, high-speed rail, 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, Kickstarter, labour market flexibility, labour mobility, land bank, liquidity trap, low interest rates, 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, Tyler Cowen: Great Stagnation, working-age population, Zipcar

Worse, Germany almost immediately tried to row back on what it had agreed in June 2012. It sought to delay the creation of a eurozone bank supervisor and limit its scope. It backtracked on the commitment to enable the ESM to directly recapitalise stricken banks. And it has sought to delay, block and emasculate the proposed common mechanism for winding down stricken banks. Moral hazard begins and ends in Berlin. 314 Banks’ lending rates for small short-term loans to new business customers fell from 5.17 per cent in June 2012 to 4.79 per cent in December 2013 in Spain, 4.57 per cent to 4.34 per cent in Italy, 7.13 per cent to 5.90 per cent in Portugal and 4.51 per cent to 4.16 per cent in Ireland.


pages: 530 words: 147,851

Small Men on the Wrong Side of History: The Decline, Fall and Unlikely Return of Conservatism by Ed West

Affordable Care Act / Obamacare, anti-communist, assortative mating, battle of ideas, Beeching cuts, Berlin Wall, Black Lives Matter, Boris Johnson, Brexit referendum, British Empire, Broken windows theory, Bullingdon Club, centre right, clean water, cognitive dissonance, Corn Laws, David Attenborough, David Brooks, deindustrialization, delayed gratification, desegregation, different worldview, Donald Trump, Elon Musk, en.wikipedia.org, Etonian, Fall of the Berlin Wall, Ferguson, Missouri, future of work, gender pay gap, George Santayana, Herbert Marcuse, illegal immigration, Jeremy Corbyn, labor-force participation, laissez-faire capitalism, lump of labour, mass immigration, means of production, megacity, meta-analysis, moral hazard, moral panic, Neil Kinnock, Nelson Mandela, Norman Mailer, obamacare, opioid epidemic / opioid crisis, Overton Window, pattern recognition, Ralph Nader, replication crisis, rising living standards, Ronald Reagan, Scientific racism, Social Justice Warrior, Stephen Fry, Steve Bannon, Steven Pinker, TED Talk, Thomas Malthus, Tragedy of the Commons, Turing test, twin studies, urban decay, War on Poverty, Winter of Discontent, zero-sum game

It changed to one of ‘need’, which put more needy people such as single mothers or immigrants – as well as people with various pathologies – ahead of locals who had queued, and who often had deep roots in the area. In doing so the welfare state obviously rubbed up against people’s sense of fairness, but to conservatives it represented the problem of moral hazard, that financial rewards for poor life choices can encourage more people to make them. Like all political controversies it’s far older than people realise, and as far back as the 1770s there were debates about the social sanctions against illegitimacy, with German social theorist Justus Möser arguing they were necessary because there needed to be incentives to marry.


Animal Spirits by Jackson Lears

1960s counterculture, Alan Greenspan, bank run, banking crisis, behavioural economics, business cycle, buy and hold, California gold rush, clockwork universe, conceptual framework, Cornelius Vanderbilt, creative destruction, cuban missile crisis, dark matter, Doomsday Clock, double entry bookkeeping, epigenetics, escalation ladder, feminist movement, financial innovation, Frederick Winslow Taylor, George Akerlof, George Santayana, heat death of the universe, Herbert Marcuse, Herman Kahn, Ida Tarbell, invisible hand, Isaac Newton, joint-stock company, Joseph Schumpeter, Lewis Mumford, lifelogging, market bubble, market fundamentalism, Mikhail Gorbachev, moral hazard, Norman Mailer, plutocrats, prosperity theology / prosperity gospel / gospel of success, Ralph Waldo Emerson, RAND corporation, Robert Shiller, Ronald Reagan, scientific management, Scientific racism, short selling, Shoshana Zuboff, Silicon Valley, source of truth, South Sea Bubble, Stanislav Petrov, Steven Pinker, Stewart Brand, Strategic Defense Initiative, surveillance capitalism, the market place, the scientific method, The Soul of a New Machine, The Wealth of Nations by Adam Smith, transcontinental railway, W. E. B. Du Bois, Whole Earth Catalog, zero-sum game

Alice Eis, an Ohio-born dancer back in America after four years abroad, told the New York Sun in 1913: “I never could see any excuse for the turkey trot anyway. It is essentially ugly.” But, she added, “not until I saw it in New York did I realize how immodest it could be.” Yet the pursuit of good health could justify the occasional moral hazard. In the end, Eis was glad that Americans had become obsessed with dancing, “because it is the most healthful exercise and tends to improve the figure and get rid of a great deal of superfluous animal spirits.” This became the standard argument for cleansing dance of erotic associations and transforming it into athletic performance, of the sort perfected by Vernon and Irene Castle.


pages: 592 words: 161,798

The Future of War by Lawrence Freedman

Albert Einstein, autonomous vehicles, Berlin Wall, Black Swan, Boeing 747, British Empire, colonial rule, conceptual framework, crowdsourcing, cuban missile crisis, currency manipulation / currency intervention, disinformation, Donald Trump, Dr. Strangelove, driverless car, drone strike, en.wikipedia.org, energy security, Ernest Rutherford, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, global village, Google Glasses, Herman Kahn, Intergovernmental Panel on Climate Change (IPCC), John Markoff, long peace, megacity, Mikhail Gorbachev, military-industrial complex, moral hazard, mutually assured destruction, New Journalism, Norbert Wiener, nuclear taboo, open economy, pattern recognition, Peace of Westphalia, RAND corporation, Ronald Reagan, South China Sea, speech recognition, Steven Pinker, Strategic Defense Initiative, Stuxnet, Suez canal 1869, Suez crisis 1956, systematic bias, the scientific method, uranium enrichment, urban sprawl, Valery Gerasimov, Wargames Reagan, WarGames: Global Thermonuclear War, WikiLeaks, zero day

Such one-sided fighting he complained was too much like a ‘spectacle,’ which aroused ‘emotions in the intense but shallow way that sports do.’9 Yet, if anything, drone pilots knew their human targets better than most, as they watched them before striking and then, after the strike, were able to see what was left of the victim and whoever else stepped into the frame at the last minute. Though the stress might be less than that experienced in actual combat, the drone pilots were not just playing glorified computer games. Yet on the second issue there was a question of impunity and moral hazard. Was it too easy to mount attacks without worrying much about the ethical implications? The practice of targeted killing was developed by the Israelis after they had withdrawn from the Gaza Strip and were trying to find ways of coping with the threat posed by Hamas. The Bush and then Obama Administrations picked up on the idea as a way of dealing with radical Islamist groups, especially those operating in territories where it was difficult to reach them on the ground.


pages: 596 words: 163,682

The Third Pillar: How Markets and the State Leave the Community Behind by Raghuram Rajan

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, air traffic controllers' union, airline deregulation, Albert Einstein, Andrei Shleifer, banking crisis, barriers to entry, basic income, battle of ideas, Bernie Sanders, blockchain, borderless world, Bretton Woods, British Empire, Build a better mousetrap, business cycle, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, central bank independence, computer vision, conceptual framework, corporate governance, corporate raider, corporate social responsibility, creative destruction, crony capitalism, crowdsourcing, cryptocurrency, currency manipulation / currency intervention, data acquisition, David Brooks, Deng Xiaoping, desegregation, deskilling, disinformation, disruptive innovation, Donald Trump, driverless car, Edward Glaeser, facts on the ground, financial innovation, financial repression, full employment, future of work, Glass-Steagall Act, global supply chain, Great Leap Forward, high net worth, household responsibility system, housing crisis, Ida Tarbell, illegal immigration, income inequality, industrial cluster, intangible asset, invention of the steam engine, invisible hand, Jaron Lanier, job automation, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, labor-force participation, Les Trente Glorieuses, low interest rates, low skilled workers, manufacturing employment, market fundamentalism, Martin Wolf, means of production, Money creation, moral hazard, Network effects, new economy, Nicholas Carr, obamacare, opioid epidemic / opioid crisis, Productivity paradox, profit maximization, race to the bottom, Richard Thaler, Robert Bork, Robert Gordon, Ronald Reagan, Sam Peltzman, shareholder value, Silicon Valley, social distancing, Social Responsibility of Business Is to Increase Its Profits, SoftBank, South China Sea, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, superstar cities, The Future of Employment, The Wealth of Nations by Adam Smith, trade liberalization, trade route, transaction costs, transfer pricing, Travis Kalanick, Tyler Cowen, Tyler Cowen: Great Stagnation, universal basic income, Upton Sinclair, Walter Mischel, War on Poverty, women in the workforce, working-age population, World Values Survey, Yom Kippur War, zero-sum game

Instead, it will rescue them and waste resources.18 Control is not free, it comes with the people assigning responsibility to the party. Can the financial market help ease the party’s problem? Probably not—it will tend to make it worse. That the party-controlled state will intervene if there are a number of failures creates the classic moral hazard problem of “too many to fail.” If markets know that the state will bail out firms or investments so long as there are a sufficient number of them, it has an incentive to create that number and more, and stop worrying about risk. The party’s desire for political control could, therefore, undermine the market’s pricing of risk.


pages: 566 words: 163,322

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World by Ruchir Sharma

"World Economic Forum" Davos, Asian financial crisis, backtesting, bank run, banking crisis, Berlin Wall, Bernie Sanders, BRICs, business climate, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, colonial rule, commodity super cycle, corporate governance, creative destruction, crony capitalism, currency peg, dark matter, debt deflation, deglobalization, deindustrialization, demographic dividend, demographic transition, Deng Xiaoping, Doha Development Round, Donald Trump, driverless car, Edward Glaeser, Elon Musk, eurozone crisis, failed state, Fall of the Berlin Wall, falling living standards, financial engineering, Francis Fukuyama: the end of history, Freestyle chess, Gini coefficient, global macro, Goodhart's law, guns versus butter model, hiring and firing, hype cycle, income inequality, indoor plumbing, industrial robot, inflation targeting, Internet of things, Japanese asset price bubble, Jeff Bezos, job automation, John Markoff, Joseph Schumpeter, junk bonds, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, Larry Ellison, lateral thinking, liberal capitalism, low interest rates, Malacca Straits, Mark Zuckerberg, market bubble, Mary Meeker, mass immigration, megacity, megaproject, Mexican peso crisis / tequila crisis, middle-income trap, military-industrial complex, mittelstand, moral hazard, New Economic Geography, North Sea oil, oil rush, oil shale / tar sands, oil shock, open immigration, pattern recognition, Paul Samuelson, Peter Thiel, pets.com, plutocrats, Ponzi scheme, price stability, Productivity paradox, purchasing power parity, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, Ronald Coase, Ronald Reagan, savings glut, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Simon Kuznets, smart cities, Snapchat, South China Sea, sovereign wealth fund, special economic zone, spectrum auction, Steve Jobs, tacit knowledge, tech billionaire, The Future of Employment, The Wisdom of Crowds, Thomas Malthus, total factor productivity, trade liberalization, trade route, tulip mania, Tyler Cowen: Great Stagnation, unorthodox policies, Washington Consensus, WikiLeaks, women in the workforce, work culture , working-age population

All those bubbles posed a clear threat to the rise of China. This credit binge had distinctly Chinese characteristics, including the borrowing by local government fronts and the Communist propaganda cheering on a capitalist bubble, but the fundamental fragilities were typical of most manias. There was the obvious moral hazard of a market in which most lenders assumed the government would bail them out if their loans failed, the obvious potential for conflicts of interest and crony lending when the state owns the biggest banks and also their biggest customers, and the familiar spectacle of new lending enterprises popping up faster than the hand of the state could whack them down.


pages: 442 words: 39,064

Why Stock Markets Crash: Critical Events in Complex Financial Systems by Didier Sornette

Alan Greenspan, Asian financial crisis, asset allocation, behavioural economics, Berlin Wall, Black Monday: stock market crash in 1987, Bretton Woods, Brownian motion, business cycle, buy and hold, buy the rumour, sell the news, capital asset pricing model, capital controls, continuous double auction, currency peg, Deng Xiaoping, discrete time, diversified portfolio, Elliott wave, Erdős number, experimental economics, financial engineering, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, global village, implied volatility, index fund, information asymmetry, intangible asset, invisible hand, John von Neumann, joint-stock company, law of one price, Louis Bachelier, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, market design, market fundamentalism, mental accounting, moral hazard, Network effects, new economy, oil shock, open economy, pattern recognition, Paul Erdős, Paul Samuelson, power law, quantitative trading / quantitative finance, random walk, risk/return, Ronald Reagan, Schrödinger's Cat, selection bias, short selling, Silicon Valley, South Sea Bubble, statistical model, stochastic process, stocks for the long run, Tacoma Narrows Bridge, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, Tobin tax, total factor productivity, transaction costs, tulip mania, VA Linux, Y2K, yield curve

The impact of these incentives is similar to what troubled U.S. savings and loan and banking industries in the 1980s and early 1990s. The study demonstrates that recent IMF lending and prospects for its future lending serve to reinforce existing counterproductive incentives and create an additional layer of risk subsidies at the international level. The corresponding moral hazard problem is that investors take unreasonable risks because they know that the IMF will act as a lender of last resort. The imitation and herding mechanisms are thus unleashed without much restraint. Another example of a pronounced synchronization between western European stock markets, unrelated to a U.S. event, comes from the period following the crashes/corrections on most emerging stock markets in early 1994.


pages: 614 words: 168,545

Rentier Capitalism: Who Owns the Economy, and Who Pays for It? by Brett Christophers

"World Economic Forum" Davos, accounting loophole / creative accounting, Airbnb, Amazon Web Services, barriers to entry, Big bang: deregulation of the City of London, Big Tech, book value, Boris Johnson, Bretton Woods, Brexit referendum, British Empire, business process, business process outsourcing, Buy land – they’re not making it any more, call centre, Cambridge Analytica, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, cloud computing, collective bargaining, congestion charging, corporate governance, data is not the new oil, David Graeber, DeepMind, deindustrialization, Diane Coyle, digital capitalism, disintermediation, diversification, diversified portfolio, Donald Trump, Downton Abbey, electricity market, Etonian, European colonialism, financial deregulation, financial innovation, financial intermediation, G4S, gig economy, Gini coefficient, Goldman Sachs: Vampire Squid, greed is good, green new deal, haute couture, high net worth, housing crisis, income inequality, independent contractor, intangible asset, Internet of things, Jeff Bezos, Jeremy Corbyn, Joseph Schumpeter, Kickstarter, land bank, land reform, land value tax, light touch regulation, low interest rates, Lyft, manufacturing employment, market clearing, Martin Wolf, means of production, moral hazard, mortgage debt, Network effects, new economy, North Sea oil, offshore financial centre, oil shale / tar sands, oil shock, patent troll, pattern recognition, peak oil, Piper Alpha, post-Fordism, post-war consensus, precariat, price discrimination, price mechanism, profit maximization, proprietary trading, quantitative easing, race to the bottom, remunicipalization, rent control, rent gap, rent-seeking, ride hailing / ride sharing, Right to Buy, risk free rate, Ronald Coase, Rutger Bregman, sharing economy, short selling, Silicon Valley, software patent, subscription business, surveillance capitalism, TaskRabbit, tech bro, The Nature of the Firm, transaction costs, Uber for X, uber lyft, vertical integration, very high income, wage slave, We are all Keynesians now, wealth creators, winner-take-all economy, working-age population, yield curve, you are the product

The fact that large banks expect the government to prevent them from failing (as it did during the financial crisis) means that they are effectively in receipt of an insurance subsidy, encouraging them to invest in asset accumulation to a greater extent than they would if they were fully exposed to the risk associated with that investment.30 The International Monetary Fund suggests that, in 2011–12, the total value of this implicit subsidy – which economists refer to as a form of ‘moral hazard’ – was somewhere between $20 billion and $110 billion for major UK banks.31 But it is unlikely that this policy – if ‘policy’ is the right word for an implicit state commitment to ensure that systemically important banks do not fail – has been the most materially significant of those UK policies that have served to encourage financial asset growth by subsidizing financial rentierism.


pages: 673 words: 164,804

Peer-to-Peer by Andy Oram

AltaVista, big-box store, c2.com, combinatorial explosion, commoditize, complexity theory, correlation coefficient, dark matter, Dennis Ritchie, fault tolerance, Free Software Foundation, Garrett Hardin, independent contractor, information retrieval, Kickstarter, Larry Wall, Marc Andreessen, moral hazard, Network effects, P = NP, P vs NP, p-value, packet switching, PalmPilot, peer-to-peer, peer-to-peer model, Ponzi scheme, power law, radical decentralization, rolodex, Ronald Coase, Search for Extraterrestrial Intelligence, semantic web, SETI@home, Silicon Valley, slashdot, statistical model, Tragedy of the Commons, UUNET, Vernor Vinge, web application, web of trust, Zimmermann PGP

One of the most critical questions is whether an entity can participate under multiple identities. Multiple participation might be difficult to prevent, because entities might be trivially able to adopt a new identity in a marketplace. In this situation, with weak identities, we have to be careful how we distinguish a bad reputation from a new reputation. This is because we may create a moral hazard: the gain from cheating may exceed the loss to reputation if the identity can be trivially discarded and a new identity trivially constructed. Weak identities also have implications for credibility, because it becomes hard to distinguish true feedback from feedback provided by the entity itself.


pages: 568 words: 164,014

Dawn of the Code War: America's Battle Against Russia, China, and the Rising Global Cyber Threat by John P. Carlin, Garrett M. Graff

1960s counterculture, A Declaration of the Independence of Cyberspace, Aaron Swartz, air gap, Andy Carvin, Apple II, Bay Area Rapid Transit, bitcoin, Brian Krebs, business climate, cloud computing, cotton gin, cryptocurrency, data acquisition, Deng Xiaoping, disinformation, driverless car, drone strike, dual-use technology, eat what you kill, Edward Snowden, fake news, false flag, Francis Fukuyama: the end of history, Hacker Ethic, information security, Internet of things, James Dyson, Jeff Bezos, John Gilmore, John Markoff, John Perry Barlow, Ken Thompson, Kevin Roose, Laura Poitras, Mark Zuckerberg, Menlo Park, millennium bug, Minecraft, Mitch Kapor, moral hazard, Morris worm, multilevel marketing, Network effects, new economy, Oklahoma City bombing, out of africa, packet switching, peer-to-peer, peer-to-peer model, performance metric, RAND corporation, ransomware, Reflections on Trusting Trust, Richard Stallman, Robert Metcalfe, Ronald Reagan, Saturday Night Live, self-driving car, shareholder value, side project, Silicon Valley, Silicon Valley startup, Skype, Snapchat, South China Sea, Steve Crocker, Steve Jobs, Steve Wozniak, Steven Levy, Stewart Brand, Stuxnet, The Hackers Conference, Tim Cook: Apple, trickle-down economics, Wargames Reagan, Whole Earth Catalog, Whole Earth Review, WikiLeaks, Y2K, zero day, zero-sum game

The transformation of the cyber incident to a potential counter-terrorism issue helped drive a new sense of urgency inside government, instantly clarifying our internal ambiguity: Was this a national security issue? We knew now that we had to make a public response. The threat also helped clarify another long-running internal government cyber debate: How much help do you give a victim? Providing aid raised a complicated moral-hazard question—if you think you’re going to be compensated and made whole every time a thief breaks into your car, what’s the incentive to lock your doors? We always tried to balance the need to step in and aid a victim after an attack with encouraging companies to do their own smart defensive work.


pages: 662 words: 180,546

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

"there is no alternative" (TINA), Adam Curtis, Alan Greenspan, Alvin Roth, An Inconvenient Truth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, bond market vigilante , bread and circuses, Bretton Woods, Brownian motion, business cycle, capital controls, carbon credits, 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, democratizing finance, disinformation, do-ocracy, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, Flash crash, full employment, George Akerlof, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Greenspan put, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kickstarter, 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, Phillips curve, Ponzi scheme, Post-Keynesian economics, precariat, prediction markets, price mechanism, profit motive, public intellectual, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, savings glut, school choice, sealed-bid auction, search costs, Silicon Valley, South Sea Bubble, Steven Levy, subprime mortgage crisis, tail risk, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, tontine, too big to fail, transaction costs, Tyler Cowen, vertical integration, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

Surprisingly, the financial crisis did not receive much attention at the conference. Many of the sessions on macroeconomics and finance didn’t mention it at all, and when it was finally discussed, the reasons cited for the financial meltdown were all over the map. It was the banks, the Fed, too much regulation, too little regulation, Fannie and Freddie, moral hazard from too-big-to-fail banks, bad and intentionally misleading accounting, irrational exuberance, faulty models, and the ratings agencies. In addition, factors I view as important contributors to the crisis, such as the conditions that allowed troublesome runs on the shadow banking system after regulators let Lehman fail, were hardly mentioned.9 Public disputations on the crisis had begun to take on the air of a bad Rodney Dangerfield film.


pages: 733 words: 179,391

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

Alan Greenspan, 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, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, bitcoin, Bob Litterman, Bonfire of the Vanities, bonus culture, break the buck, Brexit referendum, Brownian motion, business cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, carbon tax, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, confounding variable, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, democratizing finance, Diane Coyle, diversification, diversified portfolio, do well by doing good, double helix, easy for humans, difficult for computers, equity risk premium, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Glass-Steagall Act, global macro, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, information security, interest rate derivative, invention of the telegraph, Isaac Newton, it's over 9,000, James Watt: steam engine, Jeff Hawkins, Jim Simons, job satisfaction, John Bogle, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, language acquisition, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, megaproject, merger arbitrage, meta-analysis, Milgram experiment, mirror neurons, money market fund, moral hazard, Myron Scholes, Neil Armstrong, Nick Leeson, old-boy network, One Laptop per Child (OLPC), out of africa, p-value, PalmPilot, paper trading, passive investing, Paul Lévy, Paul Samuelson, Paul Volcker talking about ATMs, Phillips curve, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, proprietary trading, public intellectual, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Solow, Sam Peltzman, Savings and loan crisis, seminal paper, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, subprime mortgage crisis, survivorship bias, systematic bias, Thales and the olive presses, 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, uptick rule, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

Finally, in transportation, nobody profits from an accident. As Jeff Marcus, a safety specialist for the NTSB, put it, “You can trust people to be honest and moral about not killing themselves.” In the financial industry, unfortunately, some parties may profit, and handsomely, from the pain of others. Moral hazard is a way of life in the financial world. Nevertheless, I believe that the NTSB’s key elements of communication with the public, information gathering, and analysis need to be incorporated into the financial system. During the Quant Meltdown, my former students called me for information and reassurance.


pages: 612 words: 179,328

Buffett by Roger Lowenstein

Alan Greenspan, asset allocation, Bear Stearns, book value, Bretton Woods, buy and hold, Carl Icahn, cashless society, collective bargaining, computerized trading, corporate raider, credit crunch, cuban missile crisis, Eugene Fama: efficient market hypothesis, index card, index fund, interest rate derivative, invisible hand, Jeffrey Epstein, John Meriwether, junk bonds, Long Term Capital Management, Michael Milken, moral hazard, Paul Samuelson, random walk, risk tolerance, Robert Shiller, Ronald Reagan, Savings and loan crisis, selection bias, Teledyne, The Predators' Ball, traveling salesman, Works Progress Administration, Yogi Berra, young professional, zero-coupon bond

At the very moment that his junk-bond critique was rolling off the press, Buffett was scooping up one of the largest bundles of junk bonds ever—$440 million of RJR Nabisco paper. RJR Nabisco’s bonds had collapsed with the general market, but in Buffett’s view, the market had overreacted. (After all, RJR Nabisco was still selling a high-margin product to “addicts.”) His purchase of junk bonds might seem hypocritical, but it was not. Buffett saw a moral hazard in selling a junk bond that would likely never be repaid. Buying a bond was different. To the investor, no financial instrument was “evil per se”;38 it was a question of price. After the purchase was disclosed, Dr. Benjamin Graham, the son of Buffett’s mentor and a Berkshire stockholder, wrote to protest Berkshire’s investment in tobacco.


pages: 772 words: 203,182

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

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, benefit corporation, Black Swan, blood diamond, blue-collar work, Bolshevik threat, bonus culture, British Empire, business cycle, business process, buy and hold, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, company town, compensation consultant, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, disruptive innovation, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial engineering, financial innovation, fixed income, Ford Model T, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Glass-Steagall Act, Gordon Gekko, Greenspan put, hiring and firing, Ida Tarbell, income inequality, independent contractor, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Rogoff, labor-force participation, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, Money creation, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, Paul Volcker talking about ATMs, pension reform, performance metric, Pershing Square Capital Management, pirate software, plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, prosperity theology / prosperity gospel / gospel of success, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, rolling blackouts, Ronald Reagan, Sand Hill Road, Savings and loan crisis, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, stock buybacks, subprime mortgage crisis, The Chicago School, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

This business model is distilled in an advertisement by Interactive Brokers: “It is our belief that the US government would do everything within its power to prevent the failure of any of the major money-center banks with whom IB maintains deposits.”72 Used as an inducement in late 2010 to place capital with that Wall Street firm, moral hazard has come to profitably permeate Reagan-era banking. The Red Queen problem is general across the economy. President George W. Bush permitted the Federal Trade Commission to bring only one antitrust case, for example, an insignificant one involving several newspapers in West Virginia. In November 2010, New York Times reporter Heidi N.


pages: 695 words: 194,693

Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, book value, Bretton Woods, Brownian motion, business cycle, capital asset pricing model, Cass Sunstein, classic study, collective bargaining, colonial exploitation, compound rate of return, conceptual framework, Cornelius Vanderbilt, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, delayed gratification, Detroit bankruptcy, disintermediation, diversified portfolio, double entry bookkeeping, Edmond Halley, en.wikipedia.org, equity premium, equity risk premium, financial engineering, financial independence, financial innovation, financial intermediation, fixed income, frictionless, frictionless market, full employment, high net worth, income inequality, index fund, invention of the steam engine, invention of writing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, laissez-faire capitalism, land bank, Louis Bachelier, low interest rates, mandelbrot fractal, market bubble, means of production, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, new economy, passive investing, Paul Lévy, Ponzi scheme, price stability, principal–agent problem, profit maximization, profit motive, public intellectual, quantitative trading / quantitative finance, random walk, Richard Thaler, Robert Shiller, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, spice trade, stochastic process, subprime mortgage crisis, Suez canal 1869, Suez crisis 1956, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, time value of money, tontine, too big to fail, trade liberalization, trade route, transatlantic slave trade, tulip mania, wage slave

It would seem to be a short conceptual leap to the development of corporate capitalism, in which business entities—like perhaps the salt monopoly—would have investors who contributed capital and received, in return, a certificate indicating ownership shares. In fact, China also had a highly developed information management system. Accounting and documentation were fundamental tools used to address problems of moral hazard. Surely these technologies would have led naturally to the successful management of private enterprise: the oversight of corporate managers and agents. The single missing ingredient in Chinese financial technology was the dimension of time. Weak European governments continually resorted to deficit financing and borrowing through the late Middle Ages and Renaissance.


pages: 708 words: 196,859

Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed

Alan Greenspan, Albert Einstein, anti-communist, bank run, banking crisis, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, centre right, credit crunch, currency manipulation / currency intervention, Etonian, Ford Model T, full employment, gentleman farmer, German hyperinflation, Glass-Steagall Act, index card, invisible hand, Lao Tzu, large denomination, Long Term Capital Management, low interest rates, margin call, market bubble, Mexican peso crisis / tequila crisis, mobile money, money market fund, moral hazard, new economy, open economy, plutocrats, price stability, purchasing power parity, pushing on a string, rolodex, scientific management, the market place

In his 1927 report released in December, Gilbert declared that the time had come for Germany to take control over her own economic destiny “on her own responsibility without foreign supervision and without transfer protection.” Germany should be told once and for all exactly how much she owed and for how long. Moreover, the transfer protection clause embodied in the Dawes Plan, while useful in 1924 for restarting foreign lending, was now creating its own perverse incentives—what we now refer to as moral hazard. By providing an escape clause in the event of a payments crunch, the plan encouraged foreign bankers to be too cavalier in their lending and allowed Germany to be too lax about the consequences of accumulating so much debt “without the normal incentive to do things and carry through reforms that would clearly be in the country’s own interests.”


pages: 725 words: 221,514

Debt: The First 5,000 Years by David Graeber

Admiral Zheng, Alan Greenspan, anti-communist, back-to-the-land, banks create money, behavioural economics, bread and circuses, Bretton Woods, British Empire, carried interest, cashless society, central bank independence, classic study, colonial rule, commoditize, corporate governance, David Graeber, delayed gratification, dematerialisation, double entry bookkeeping, financial innovation, fixed income, full employment, George Gilder, informal economy, invention of writing, invisible hand, Isaac Newton, joint-stock company, means of production, microcredit, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, oil shock, Panopticon Jeremy Bentham, Paul Samuelson, payday loans, place-making, Ponzi scheme, Post-Keynesian economics, price stability, profit motive, reserve currency, Right to Buy, Ronald Reagan, scientific management, seigniorage, sexual politics, short selling, Silicon Valley, South Sea Bubble, subprime mortgage crisis, Thales of Miletus, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transatlantic slave trade, tulip mania, upwardly mobile, urban decay, working poor, zero-sum game

Basically, that’s the situation the IMF created on a global level—which is how you could have all those banks willing to fork over billions of dollars to a bunch of obvious crooks in the first place.” I didn’t get quite that far, because at about that point a drunken financier appeared, having noticed that we were talking about money, and began telling funny stories about moral hazard—which somehow, before too long, had morphed into a long and not particularly engrossing account of one of his sexual conquests. I drifted off. Still, for several days afterward, that phrase kept resonating in my head. “Surely one has to pay one’s debts.” The reason it’s so powerful is that it’s not actually an economic statement: it’s a moral statement.


The Half Has Never Been Told: Slavery and the Making of American Capitalism by Edward E. Baptist

banks create money, barriers to entry, book value, British Empire, California gold rush, Cass Sunstein, colonial rule, cotton gin, creative destruction, desegregation, double helix, financial innovation, Joseph Schumpeter, manufacturing employment, Monroe Doctrine, moral hazard, mortgage debt, new economy, public intellectual, Ralph Waldo Emerson, scientific management, Scientific racism, Silicon Valley, South Sea Bubble, Thomas Malthus, trade route, transatlantic slave trade, transcontinental railway, vertical integration, Works Progress Administration

For the slave prices were still rising.82 Yet the consequences of seemingly infinite and risk-free leverage were perverse, and not just because sexual predation helped stoke the risk-taking atmosphere. Securitization enabled both the immediate borrower and the immediate lender to escape the direct consequences of risk—economists call this “moral hazard”—even as they dramatically increased the total risk accumulated in the financial system. The multiplication of total leverage dramatically amplified the general consequences of a potential setback, such as a sudden decline in the cotton prices by which enslavers multiplied pounds picked per hand to calculate anticipated revenue.


pages: 1,520 words: 221,543

Britain at Bay: The Epic Story of the Second World War: 1938-1941 by Alan Allport

Bletchley Park, Boris Johnson, British Empire, centre right, clean water, COVID-19, disinformation, Downton Abbey, hydroponic farming, imperial preference, lone genius, mass incarceration, military-industrial complex, moral hazard, new economy, plutocrats, trade route, éminence grise

His allegiance, as he saw it, was not to any particular party but to the ratepayers of Grantham. And the essential task of local government, he believed, was to keep taxes as low as possible and public expenditure concomitantly limited. Roberts viewed this as a matter of ethics as much as of economics. There was, he believed, an inherent moral hazard in levying taxes on hard-working burghers to pay for social services for the idle. ‘The people who don’t pay the rates are sponging on those who do,’ he complained in 1937.25 Roberts did not dispute that those who had been fortunate in life had an obligation to the poor. But that obligation ought properly to be discharged through voluntary charitable work rather than a compulsorily funded state dole.


pages: 767 words: 208,933

Liberalism at Large: The World According to the Economist by Alex Zevin

"there is no alternative" (TINA), activist fund / activist shareholder / activist investor, affirmative action, Alan Greenspan, anti-communist, Asian financial crisis, bank run, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, business cycle, capital controls, carbon tax, centre right, Chelsea Manning, collective bargaining, Columbine, Corn Laws, corporate governance, corporate social responsibility, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, desegregation, disinformation, disruptive innovation, do well by doing good, Donald Trump, driverless car, Edward Snowden, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Francis Fukuyama: the end of history, full employment, Gini coefficient, Glass-Steagall Act, global supply chain, guns versus butter model, hiring and firing, imperial preference, income inequality, interest rate derivative, invisible hand, It's morning again in America, Jeremy Corbyn, John von Neumann, Joseph Schumpeter, Julian Assange, junk bonds, Khartoum Gordon, land reform, liberal capitalism, liberal world order, light touch regulation, Long Term Capital Management, low interest rates, market bubble, Martin Wolf, means of production, Michael Milken, Mikhail Gorbachev, Monroe Doctrine, Mont Pelerin Society, moral hazard, Naomi Klein, new economy, New Journalism, Nixon triggered the end of the Bretton Woods system, no-fly zone, Norman Macrae, Northern Rock, Occupy movement, Philip Mirowski, plutocrats, post-war consensus, price stability, quantitative easing, race to the bottom, railway mania, rent control, rent-seeking, road to serfdom, Ronald Reagan, Rosa Parks, Seymour Hersh, Snapchat, Socratic dialogue, Steve Bannon, subprime mortgage crisis, Suez canal 1869, Suez crisis 1956, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trade liberalization, trade route, unbanked and underbanked, underbanked, unorthodox policies, upwardly mobile, War on Poverty, WikiLeaks, Winter of Discontent, Yom Kippur War, young professional

By then the board of directors was putting pressure on Emmott, concerned that top talent was fleeing the paper because of his determination to stay. When Emmott replaced Crook with Emma Duncan as deputy editor, viewed as unlikely to challenge him, John Micklethwait did so instead – bringing the board a job offer from the rightwing British weekly the Spectator that forced Emmott to depart suddenly in March 2006. Dukes of Moral Hazard: Micklethwait and Wooldridge The appointment of John Micklethwait as the sixteenth editor was announced with great fanfare in 2006. ‘In his tailored suit and polished shoes’, the Guardian found him ‘poised, unmistakably upmarket … the essence of a well-educated English gentleman editor, charming, a touch self-deprecating, but to the point.’


pages: 798 words: 240,182

The Transhumanist Reader by Max More, Natasha Vita-More

"World Economic Forum" Davos, 23andMe, Any sufficiently advanced technology is indistinguishable from magic, artificial general intelligence, augmented reality, Bill Joy: nanobots, bioinformatics, brain emulation, Buckminster Fuller, cellular automata, clean water, cloud computing, cognitive bias, cognitive dissonance, combinatorial explosion, Computing Machinery and Intelligence, conceptual framework, Conway's Game of Life, cosmological principle, data acquisition, discovery of DNA, Douglas Engelbart, Drosophila, en.wikipedia.org, endogenous growth, experimental subject, Extropian, fault tolerance, Flynn Effect, Francis Fukuyama: the end of history, Frank Gehry, friendly AI, Future Shock, game design, germ theory of disease, Hans Moravec, hypertext link, impulse control, index fund, John von Neumann, joint-stock company, Kevin Kelly, Law of Accelerating Returns, life extension, lifelogging, Louis Pasteur, Menlo Park, meta-analysis, moral hazard, Network effects, Nick Bostrom, Norbert Wiener, pattern recognition, Pepto Bismol, phenotype, positional goods, power law, precautionary principle, prediction markets, presumed consent, Project Xanadu, public intellectual, radical life extension, Ray Kurzweil, reversible computing, RFID, Ronald Reagan, scientific worldview, silicon-based life, Singularitarianism, social intelligence, stem cell, stochastic process, superintelligent machines, supply-chain management, supply-chain management software, synthetic biology, systems thinking, technological determinism, technological singularity, Ted Nelson, telepresence, telepresence robot, telerobotics, the built environment, The Coming Technological Singularity, the scientific method, The Wisdom of Crowds, transaction costs, Turing machine, Turing test, Upton Sinclair, Vernor Vinge, Von Neumann architecture, VTOL, Whole Earth Review, women in the workforce, zero-sum game

Don’t science questions resolve too slowly? Why should I trust the judges? Won’t judging cost too much? Won’t wealthy people have too much influence? Won’t the market be dominated by fools? Won’t advertising manipulate opinion? Aren’t markets full of cheats and thieves? What about insider trading? What about “moral hazard”? What about incentives to start false rumors? What about incentives to keep information secret? Won’t an apparent consensus create a crowd mentality? Will the new incentives slow or stop convergence? Won’t different claim wordings, judges, and base assets confuse the consensus? Won’t the consensus reflect risk preferences as well as beliefs?


Growth: From Microorganisms to Megacities by Vaclav Smil

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, agricultural Revolution, air freight, Alan Greenspan, American Society of Civil Engineers: Report Card, Anthropocene, Apollo 11, Apollo Guidance Computer, autonomous vehicles, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Boeing 747, Bretton Woods, British Empire, business cycle, caloric restriction, caloric restriction, carbon tax, circular economy, colonial rule, complexity theory, coronavirus, decarbonisation, degrowth, deindustrialization, dematerialisation, demographic dividend, demographic transition, Deng Xiaoping, disruptive innovation, Dissolution of the Soviet Union, Easter island, endogenous growth, energy transition, epigenetics, Fairchild Semiconductor, Ford Model T, general purpose technology, Gregor Mendel, happiness index / gross national happiness, Helicobacter pylori, high-speed rail, hydraulic fracturing, hydrogen economy, Hyperloop, illegal immigration, income inequality, income per capita, industrial robot, Intergovernmental Panel on Climate Change (IPCC), invention of movable type, Isaac Newton, James Watt: steam engine, knowledge economy, Kondratiev cycle, labor-force participation, Law of Accelerating Returns, longitudinal study, low interest rates, mandelbrot fractal, market bubble, mass immigration, McMansion, megacity, megaproject, megastructure, meta-analysis, microbiome, microplastics / micro fibres, moral hazard, Network effects, new economy, New Urbanism, old age dependency ratio, optical character recognition, out of africa, peak oil, Pearl River Delta, phenotype, Pierre-Simon Laplace, planetary scale, Ponzi scheme, power law, Productivity paradox, profit motive, purchasing power parity, random walk, Ray Kurzweil, Report Card for America’s Infrastructure, Republic of Letters, rolodex, Silicon Valley, Simon Kuznets, social distancing, South China Sea, synthetic biology, techno-determinism, technoutopianism, the market place, The Rise and Fall of American Growth, three-masted sailing ship, total factor productivity, trade liberalization, trade route, urban sprawl, Vilfredo Pareto, yield curve

Zhang, W. 2006. Economic Growth with Income and Wealth Distribution. London: Palgrave Macmillan. Zhao, Y., and S. Wang. 2015. The relationship between urbanization, economic growth and energy consumption in China: An econometric perspective analysis. Sustainability 7:5609–5627. Zheng, C. Z. 2015. Military Moral Hazard and the Fate of Empires. http://economics.uwo.ca/people/zheng_docs/empire.pdf. Zheng, H., et al. 2012. MtDNA analysis of global populations support that major population expansions began before Neolithic time. Scientific Reports 2:745. doi:10.1038/srep00745. Zhou, Y., et al. 2012. Options of sustainable groundwater development in Beijing Plain, China.


pages: 1,042 words: 266,547

Security Analysis by Benjamin Graham, David Dodd

activist fund / activist shareholder / activist investor, asset-backed security, backtesting, barriers to entry, Bear Stearns, behavioural economics, book value, business cycle, buy and hold, capital asset pricing model, Carl Icahn, carried interest, collateralized debt obligation, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, fear of failure, financial engineering, financial innovation, fixed income, flag carrier, full employment, Greenspan put, index fund, intangible asset, invisible hand, Joseph Schumpeter, junk bonds, land bank, locking in a profit, Long Term Capital Management, low cost airline, low interest rates, Michael Milken, moral hazard, mortgage debt, Myron Scholes, prudent man rule, Right to Buy, risk free rate, risk-adjusted returns, risk/return, secular stagnation, shareholder value, stock buybacks, The Chicago School, the market place, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, two and twenty, zero-coupon bond

Amidst severe turbulence, the Fed frequently lowers interest rates to prop up securities prices and restore investor confidence. While the intention of Fed officials is to maintain orderly capital markets, some money managers view Fed intervention as a virtual license to speculate. Aggressive Fed tactics, sometimes referred to as the “Greenspan put” (now the “Bernanke put”), create a moral hazard that encourages speculation while prolonging overvaluation. So long as value investors aren’t lured into a false sense of security, so long as they can maintain a long-term horizon and ensure their staying power, market dislocations caused by Fed action (or investor anticipation of it) may ultimately be a source of opportunity.


pages: 879 words: 309,222

Nobody's Perfect: Writings From the New Yorker by Anthony Lane

a long time ago in a galaxy far, far away, Apollo 13, classic study, colonial rule, dark matter, Frank Gehry, General Magic , Great Leap Forward, haute cuisine, Index librorum prohibitorum, junk bonds, Mahatma Gandhi, Maui Hawaii, moral hazard, Neil Armstrong, Norman Mailer, profit motive, Ronald Reagan, sexual politics, Strategic Defense Initiative, The Great Good Place, trade route, University of East Anglia, Upton Sinclair, urban decay, urban planning

Yet here he was, still in the entrance hall of a new century, having the wit to wonder if his homeland would, after all, turn out to be what he would call the Great Good Place; if the same adventure in consciousness that drew Isabel Archer over the sea would lead others to make the return trip, unable to resist the temptations, the edifying screwups, of the moral hazard. His instincts, as ever, were correct, and people have spent the last ninety years or so in James’s trembling wake; even if you remain on English soil and merely read your way into America, you are stepping westward. London subscribers to The New York Review of Books, for example, can spirit themselves out of English rain and rancor not just with a reading of that journal’s excellent reviews, but with an even more careful scan of its personals column—perhaps the boldest and most tireless display of unconscious comedy in the civilized world.


From Peoples into Nations by John Connelly

Albert Einstein, anti-communist, bank run, Berlin Wall, Cass Sunstein, centre right, collective bargaining, colonial exploitation, colonial rule, crony capitalism, cuban missile crisis, disinformation, facts on the ground, Fall of the Berlin Wall, financial independence, German hyperinflation, Gini coefficient, Johann Wolfgang von Goethe, joint-stock company, laissez-faire capitalism, land bank, land reform, land tenure, liberal capitalism, means of production, Mikhail Gorbachev, moral hazard, oil shock, old-boy network, open borders, Panopticon Jeremy Bentham, Peace of Westphalia, profit motive, purchasing power parity, Ronald Reagan, strikebreaker, the built environment, The Chicago School, trade liberalization, Transnistria, union organizing, upwardly mobile, wikimedia commons, women in the workforce

Communists believed in the dominance of state ownership, and that socialism was a society based on steel and concrete; they had adopted NEM as a set of temporary measures and had no commitment to real market relationships, producing what economist János Kornai called “soft budget constraints.” Because firms could not go bankrupt, managers treated tax and price polices not as a real limitation but only as an “accounting relationship over which bargaining is possible.” The state became an “insurance company taking over all the moral hazards with well-known consequences: the insured will be less careful in protecting his wealth.” The soft budget constraint protected inefficient firms from constructive destruction, thus impeding innovation.62 Despite the glitz of shop windows in Budapest when Mikhail Gorbachev came to power in 1985, the Hungarian economic reform was therefore not a success story.


pages: 1,544 words: 391,691

Corporate Finance: Theory and Practice by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann le Fur, Antonio Salvi

"Friedman doctrine" OR "shareholder theory", accelerated depreciation, accounting loophole / creative accounting, active measures, activist fund / activist shareholder / activist investor, AOL-Time Warner, ASML, asset light, bank run, barriers to entry, Basel III, Bear Stearns, Benoit Mandelbrot, bitcoin, Black Swan, Black-Scholes formula, blockchain, book value, business climate, business cycle, buy and hold, buy low sell high, capital asset pricing model, carried interest, collective bargaining, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, currency risk, delta neutral, dematerialisation, discounted cash flows, discrete time, disintermediation, diversification, diversified portfolio, Dutch auction, electricity market, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial innovation, fixed income, Flash crash, foreign exchange controls, German hyperinflation, Glass-Steagall Act, high net worth, impact investing, implied volatility, information asymmetry, intangible asset, interest rate swap, Internet of things, inventory management, invisible hand, joint-stock company, joint-stock limited liability company, junk bonds, Kickstarter, lateral thinking, London Interbank Offered Rate, low interest rates, mandelbrot fractal, margin call, means of production, money market fund, moral hazard, Myron Scholes, new economy, New Journalism, Northern Rock, performance metric, Potemkin village, quantitative trading / quantitative finance, random walk, Right to Buy, risk free rate, risk/return, shareholder value, short selling, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, stocks for the long run, supply-chain management, survivorship bias, The Myth of the Rational Market, time value of money, too big to fail, transaction costs, value at risk, vertical integration, volatility arbitrage, volatility smile, yield curve, zero-coupon bond, zero-sum game

When a group’s corporate structure becomes totally unbalanced, debt no longer acts as an incentive for management. On the contrary, the corporate manager will be tempted to continue expanding via debt until his group has become too big to fail, like RBS, Fortis, AIG, Citi, etc., until the concept of too big to fail is tested (Lehman). This risk is called “moral hazard”. 2. LBOs, this logic’s pushed to the limits Some sectors are being restructured through LBO transactions, which we will look at in further detail in Chapter 46. An LBO is the acquisition, generally by management (MBO), of all of a company’s shares using borrowed funds. It becomes a leveraged buildup if it then uses debt to buy other companies in order to increase its standing in the sector.


pages: 1,336 words: 415,037

The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

affirmative action, Alan Greenspan, Albert Einstein, anti-communist, AOL-Time Warner, Ayatollah Khomeini, barriers to entry, Bear Stearns, Black Monday: stock market crash in 1987, Bob Noyce, Bonfire of the Vanities, book value, Brownian motion, capital asset pricing model, card file, centralized clearinghouse, Charles Lindbergh, collateralized debt obligation, computerized trading, Cornelius Vanderbilt, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, do what you love, Donald Trump, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, Fairchild Semiconductor, Fillmore Auditorium, San Francisco, financial engineering, Ford Model T, Garrett Hardin, Glass-Steagall Act, global village, Golden Gate Park, Greenspan put, Haight Ashbury, haute cuisine, Honoré de Balzac, If something cannot go on forever, it will stop - Herbert Stein's Law, In Cold Blood by Truman Capote, index fund, indoor plumbing, intangible asset, interest rate swap, invisible hand, Isaac Newton, it's over 9,000, Jeff Bezos, John Bogle, John Meriwether, joint-stock company, joint-stock limited liability company, junk bonds, Larry Ellison, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, Marshall McLuhan, medical malpractice, merger arbitrage, Michael Milken, Mikhail Gorbachev, military-industrial complex, money market fund, moral hazard, NetJets, new economy, New Journalism, North Sea oil, paper trading, passive investing, Paul Samuelson, pets.com, Plato's cave, plutocrats, Ponzi scheme, proprietary trading, Ralph Nader, random walk, Ronald Reagan, Salesforce, Scientific racism, shareholder value, short selling, side project, Silicon Valley, Steve Ballmer, Steve Jobs, supply-chain management, telemarketer, The Predators' Ball, The Wealth of Nations by Adam Smith, Thomas Malthus, tontine, too big to fail, Tragedy of the Commons, transcontinental railway, two and twenty, Upton Sinclair, War on Poverty, Works Progress Administration, Y2K, yellow journalism, zero-coupon bond

If a hedge fund, however large, was too big to fail, then what large financial institution would ever be allowed to collapse? The government risked becoming the margin of safety.41 No serious consequences had come about in the end from the derivatives near-meltdown. The market afterward seemed to behave as if no serious consequences ever could. This threat, the so-called “moral hazard,” was a chronic worry of regulators. But the world would always be full of people who loved risk. When it came to business, Buffett’s veins were filled with ice, but plenty of other people’s pulsed with adrenaline much of the time. Some of them had even been members of his own family. 52 Chickenfeed Decatur, Illinois, and Atlanta • 1995–1999 Howie and Devon were on the lam.


pages: 1,773 words: 486,685

Global Crisis: War, Climate Change and Catastrophe in the Seventeenth Century by Geoffrey Parker

agricultural Revolution, British Empire, classic study, Climatic Research Unit, colonial rule, creative destruction, currency manipulation / currency intervention, Defenestration of Prague, Edmond Halley, en.wikipedia.org, European colonialism, failed state, Fellow of the Royal Society, financial independence, friendly fire, Google Earth, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, it's over 9,000, Johannes Kepler, Joseph Schumpeter, Khyber Pass, mass immigration, Mercator projection, moral hazard, mortgage debt, Peace of Westphalia, Peter Thiel, public intellectual, Republic of Letters, sexual politics, South China Sea, the market place, trade route, transatlantic slave trade, unemployed young men, University of East Anglia, World Values Survey, zero-sum game

., ‘Climatic cycles and behavioural revolutions: the emergence of modern humans and the beginning of farming’, Antiquity, LXXI (1997), 271–87 Shi Yafeng and Liu Shiyin, ‘Estimation of the response of glaciers in China to the global warming in the twenty-first century’, Chinese Science Bulletin, XLV (2000), 668–72 Shindell, D. T., ‘Volcanic and solar forcing of climate change during the Preindustrial Era’, Journal of Climate Change, XVI (2003), 4,094–4,107 Shiue, C. H., ‘Local granaries and central government disaster relief: moral hazard and interregional finance in eighteenth- and nineteenth-century China’, Journal of Economic History, LXIV (2004), 100–24 Shiveley, D. H., ‘Sumptuary regulation and status in early Tokugawa Japan’, Harvard Journal of Asiatic Studies, XXV (1964–5), 123–64 Shy, J., A people numerous and armed: Reflections on the military struggle for American independence (2nd edn, Oxford, 1990) SIDES, see Società italiana di demografia storica Signorotto, G., Milano spagnola.