Many friends over the years have asked me - ‘what can I read that tells me about finance and investment in a non-technical way but doesn’t insult my intelligence?’ Few books do this. I have often recommended Burton Malkiel’s A Random Walk down Wall Street, but that book is now old (first published in the 1970s) and very American. So I thought I would have a go myself. And the credit crunch made it all the more topical.
1. In assessing risk in financial models, how effective are current modeling methodologies in incorporating model error or model uncertainty? Specifically, have these models appropriately captured the implications for underlying statistical relationships of the impacts of aggregate shocks? 2. Do we have adequate tools and methodologies to stress test these models? This is particularly challenging in the area of consumer credit portfolios and their dependence on expected loss distributions. 3. How should we evaluate the trade-off, if any, between undertaking policy interventions aimed at combating short-run financial instability and the potential financial market distortions and moral hazard that could result from those interventions?
The financial sector’s debts grew even faster as banks sought to bolster their returns on equity by “levering up”. According to one recent estimate, the total leverage ratios (on- and off-book assets and exposure divided by tangible equity) for the two biggest US banks were 88:1 for Citibank and 134:1 for Bank of America. The bursting of the property bubble caused such ratios, which were already too high on the eve of the crisis, to explode as off-balance-sheet commitments and pre-arranged credit lines came home to roost. Only by borrowing from the Federal Reserve on an unprecedented scale have the banks been able to stay in business....
The result has been an explosion of the Fed’s balance sheet and of the monetary base. With assets approaching $2,263bn and capital of less than $40bn, the Fed increasingly resembles a public hedge fund, leveraged at more than 50:1.
Presenter Tim Harford considers the risks of eating Irish sausages contaminated with dioxin; why the latest retail sales figures are not as bad as the retailers' make them sound; the quirks of British street numbering; and he witnesses the most important numbers in the world being calculated: the London Interbank Offered Rate - LIBOR.
In the market equivalent of shoveling cash under the mattress, hordes of buyers were so eager on Tuesday to park money in the world’s safest investment, United States government debt, that they agreed to accept a zero percent rate of return.
Mistakes happen even at good hospitals, of course. But evidence shows that University, which is owned by the State University of New York system, is not a good hospital. In fact, in late 2006 a state commission recommended that it be scaled back and merged with another hospital.
Touch also turns out to be easy to fool. Among the sensory tricks now being investigated is something called the Pinocchio illusion. Researchers have found that if they vibrate the tendon of the biceps, many people report feeling that their forearm is getting longer, their hand drifting ever further from their elbow. And if they are told to touch the forefinger of the vibrated arm to the tip of their nose, they feel as though their nose was lengthening, too.
Some tactile illusions require the collusion of other senses. People who watch a rubber hand being stroked while the same treatment is applied to one of their own hands kept out of view quickly come to believe that the rubber prosthesis is the real thing, and will wince with pain at the sight of a hammer slamming into it. Other researchers have reported what they call the parchment-skin illusion. Subjects who rubbed their hands together while listening to high-frequency sounds described their palms as feeling exceptionally dry and papery, as though their hands must be responsible for the rasping noise they heard. Look up, little Pinocchio! Somebody’s pulling your strings.
The government of Cambodia has an interesting and innovative method of identifying issues of concern from the private sector and addressing them– directly communicating through the Government Private Sector Forum...
The forum is important because of the resulting decisions. The World Bank Group’s International Finance Corporation (IFC), which provides financial and technical support for the secretariat of the forum, conducted an evaluation (pdf) last year that showed very high returns to their support. It is also important because of the forum it provides for discussion. In one instance last week, there was a healthy exchange of ideas about the marked slowdown of economic growth in Cambodia. I think the meeting is also important for the private sector to hold the government accountable for its past decisions and to work toward a better investment climate.
