Coursera – Financial Markets with Robert Shiller

If you’re interested in what Coursera has to offer, Financial Markets with Robert Shiller would be a good place to start.

Id recommend watching Coursera videos at 1.5x speed in order to save time. There are mini-quizzes that pop up during some videos to check that you’ve been retaining what the lecturer is saying.

The lecturer and guest lecturer for this course function as another data point on winner take all markets and how MOOCs will gain market share by packaging the contributions of several superstars in their respective fields.

I’m coming round to the view that online education will never replace the signalling function of bum-in-seat tertiary education – which is unfortunate for fans of technological disruption – but takes into account the sociological issues that stem from the tertiary education arms race, namely credentialism where more and more degrees are required to gain entry into labour market niches where an excess return can be earned.

How Would Thomas Piketty Explain The Case Of Sir Peter Maire?

When poor people write about rich people, they show their lack of real world knowledge. The most glaring omission in this wealth inequality writing is the lack of understanding of how volatile or “high beta” wealth can be.

Expectations of future profits can change significantly and thus the value of those expected future profits – your wealth – can change significantly as well over time. Making poor investment decisions is a really bad idea!

One of the most fascinating things about Thomas Piketty’s work is the lack of discussion of the idea that many wealthy people lose their fortunes while they’re still alive, let alone end up with children who embarrass their legacy with poor economic achievement.

How can Thomas Piketty explain the unfortunate reversal of fortune experienced by Navman founder Sir Peter Maire who has gone from Rich List to still-rich-but-his-ego-has-taken-a-massive-hit? (PAID) His r < g so his stock of capital has been falling…

There is a case to be made that a lot of the income inequality / wealth inequality shtick is emanating from academics and commentators suffering from status-income disequilibrium. The ups and downs of making investment decisions under conditions of uncertainty are completely outside their day-to-day reality! Of course they can’t comprehend the idea of reversal of fortune and explain such regular events credibly!

The Opportunity

The opportunity is there for the taking. But in an election year, negative outlooks and doom-and-gloom predictions are a bit easier to push down the throats of the electorate.

Skill-biased technological change is happening all around the world, and it’s a global story not limited to San Francisco, New York or London. Just look at the explosion in households earning more than $100,000 per annum since the last census.

Thousands of little niche markets exist that have business needs that can be solved by someone with domain knowledge teaming up with people who have technical knowledge.

They don’t need a massive venture capital investment or time in an incubator. They just need to find a way to commercialise a solution to a problem without bleeding cash. It’s possible, it’s achievable and it’s amazing that more people aren’t thinking about these opportunities.

A key failure on the part of policymakers is thinking that these opportunities can be acted on by anyone. That, with the perfect mix of government subsidy and prodding, New Zealand can become a tech powerhouse.

It’s ridiculous. There’s already organic interest in the opportunities, there’s already a lot of Kiwis doing exceptional stuff in the “real startup” sphere as opposed to the “take grant money and bail” sphere.

The opportunity to build companies that have highly skilled workers who receive decent salaries is there for the taking. The level of startup capital required is lower than ever – a laptop and an AWS account are the new starting point.

It must be done, it can be done and it will be done. With or without the government trying to pick winners in the technology sector.

Government largesse isn’t the answer here – in fact, it puts the whole opportunity at grave risk because it stuffs up the market signals gained from entrepreneurial trial and error.

Interesting Piece On Fidelity

Bloomberg have an interesting piece about how US giant Fidelity is dealing with lower fees from mutal funds and the growth of exchange traded funds.

What jumped out at me was the massive size of the US fund management industry – just 3 large players are gargantuan:

Fidelity employs 40,000 people in the U.S., managed $1.7 trillion in assets directly as of June 30 and administered a total of $4 trillion worldwide. In addition to its financial services income, the FMR holding company took in an estimated $4.52 billion in revenue last year from private-equity investments, including real estate and a building materials company.

The firm has struggled to grow money-management assets. Vanguard, which surpassed Fidelity as the biggest U.S. mutual-fund company in 2010 and offers mostly index funds and ETFs, has been a beneficiary of the shift into passive funds. Its assets surged 73 percent to $2.6 trillion during the six and a half years from the end of 2007 to June 30, 2013. BlackRock, the world’s biggest money manager, more than doubled assets to $3.9 trillion in the period.Pimco, whose funds are overseen by Co-Chief Investment Officer Bill Gross, has seen its assets more than double to $2 trillion.

The piece was particularly interesting following NZ First Leader Winston Peters’ comments about setting up a “KiwiFund” as a condition of any confidence and supply agreement after next year’s election. He might want to read John Cochrane on the size of the finance industry and how it’s misunderstood.

READ: John Cochrane On Financial Reform And Macroprudential Policy

Financial Reform in 12 Minutes:

The “macroprudential” idea that the Fed can spot “bubbles” forming, and can and will stabilize asset prices by artfully controlling interest rates, intervening in many markets, and controlling the details of financial flows, so that nobody loses any money in the first place, is a triumph of pipe dreaming. (An earlier panelist eloquently called it “profoundly misguided.”)

Go read the whole thing at The Grumpy Economist.

Revisiting Lehman Brothers Chapter 11 Filing Five Years Ago

Five years ago today, Lehman Brothers, one of the world’s largest investment banks, filed for Chapter 11 bankruptcy protection.

I thought this weekend would be an opportune time to revisit the report of the Examiner, Anton Valukus, chairman of accounting firm Jenner & Block.

The global financial crisis has created a non-trivial community of bloggers and commentators who write angry screeds against the financial sector, but don’t take the time to read the detailed reports like this.

There was clearly no need for TARP or giving investment banks access to the discount window. There is nothing wrong with imposing losses on shareholders, but when executives have little skin in the game because they didn’t really fork out for their equity holdings in their employers, of course there will be issues around risk taking.

The Chapter 11 documentation website shows the difference between how the US deals with corporate insolvency and how New Zealand and Australia do.

Michael West, writing in the Sydney Morning Herald, points out how the Australian arm of Lehman Brothers has paid out millions of dollars to liquidators and lawyers but nothing to creditors yet.

From an economists perspective, if you are an unsecured creditor, you now need to account for the opportunity cost of money tied up in insolvency proceedings. This means that less credit will be available, less deals will get done and the silent recovery will take a lot longer.

Reserve Bank Responds To Submissions On LVR Speed Limits

Today the Reserve Bank released their response to submissions on the LVR speed limit “macroprudential tool” they intend to implement to curb what they see as risky lending.

If you want to know the full story read the long document over at the RBNZ.

Key Points:

  • There were only 20 submissions, mainly from banks. Interestingly, small banks with an average of $100M / month in residential mortgage lending over a rolling 3 month won’t face speed limit
  • The RBNZ will restrict the proportion of high LVR lending as opposed to high LVR lending itself – presumably in recognition of the reality that many high LVR mortgages will be to very high earning couples
  • There will be a transition period because some banks think they’d breach the rules even if they stopped all high LVR mortgage approvals tomorrow
  • There will be an anti-avoidance rule so banks can’t get around the speed limit – the detail can be found in section 7 of the updated BS19 document (Framework for restrictions on high-LVR residential mortgage lending)
  • It will take time for banks to process their backlog of pre-approvals if the speed limit is applied and time for them to forecast high LVR loan flow to stay under the limit
  •  Disintermediation risk is acknowledged – people topping up deposits with credit cards or using multiple second tier loans to resemble a traditional residential mortgage – banks could be hit by anti-avoidance provisions if they try to get around restrictions

There is a lot of stuff that still needs to be worked out by the Reserve Bank and the banking sector. If we think about what the Reserve Bank is trying to achieve – dampening what it sees as risky lending in the housing sector – and then we think about what the government is trying to achieve – every special snowflake moaner being able to afford a house – I have to wonder why, in the light of how Basel III has already impacted the lending that actually matters to growing the economy i.e. commercial and agricultural lending – why they don’t save the expense and complications of this scheme with something simpler?

Finance: Function Matters, Not Size by John Cochrane

I read this ages ago but thought I’d blog about it again.

“Finance: Function Matters, Not Size” is a really interesting look at the size of finance as a share of the economy.

He points out that trying to determine the optimal percentage of GDP dedicated to a specific sector is a fool’s errand. It flies completely against Hayek’s work on central planning defects.

He points out that the finance industry expanded enormously over the past few decades but prices didn’t really fall. Think of the “2 and 20” hedge fund fee structure. That implies that there has been a shift to the right of the financial services demand curve.

Also, because many fees in finance are based on assets under management, as wealth has grown in the economy, fixed costs per fund manager have increased a bit but because AuM has increased even more that’s why you see multi-million dollar compensation packages. A handle of people can manage an enormous amount of assets.

An interesting read and well worth your time if you’re sick of the bagging of the finance industry. Here in New Zealand, the reluctance to discuss the collapse of the second tier lending industry as a key supply side shock making housing affordability harder to achieve is disappointing.

Venture Hacks Is A Cool Venture Capital Related Blog

I stumbled across a pretty cool US centric venture capital blog VentureHacks.

I recommend checking out this post “The Entrepreneurial Age”.

Physics, information, hardware, software, marketing, press, business development, recruiting, training and every damn thing a business needs to do is quickly becoming available as a service. And innovations by one company are quickly made available to its competitors by other entrepreneurs.

It is no longer effective to rely on any type of differentiation—organizations must focus on delivering the best product in the world to as many people as possible. All other activities just help them on their way.


It is an interesting perspective. A lot of money is being left on the table by New Zealand firms that don’t have websites or think that the government should impose costs on everyone else to prop up poorly thought through business models.

When Technocrats Strike (Bank Of International Settlements Basel III Edition)

Over at TVHE, Matt writes about the BIS arguing that structural adjustments and balance sheet restructuring should be imposed on the world without any democratic input. He makes it clear that there has to be some democratic input into these processes. I argue that the BIS has already won a cold war against risky lending with Basel III.

The Bank of International Settlements is a technocratic institution based in Basel, Switzerland. Alongside providing a lot of good stuff in the form of supervising global payments systems and coming up with some very good global settlement policy, it has also produced one of the most complicated pieces of technocrat policy since Bretton-Woods.

That would be Basel III – a series of capital and liquidity requirements for all banks around the world. Check your local bank’s Key Disclosure Statement – you’ll find a lot of footnotes stating how they’re transitioning towards Basel III compliance and some banks are even raising additional capital so that their Tier 1 capital ratio is higher than it needs to be “just in case”.

These capital and liquidity requirements are obviously a good idea in the aftermath of the global financial crisis. Investment banks like Lehman Brothers and Bear Stearns over-extended themselves on mortgage-backed securities and when they marked their positions to market, they essentially were worthless.

The US Treasury, using AIG Financial Products as a conduit, paid out the credit default swaps on all of these sub-prime CDOs at 100 cents on the dollar. This transferred hundreds of billions of dollars from US taxpayers to Wall Street banks.

In essence, Basel III is a technocratic series of rules and committee based supervision (seriously) that aims to avoid a repeat of 2008. The theory goes that if banks have to hold more capital and make fewer risky loans, then the financial system will be more stable and there’ll be no need for big bank bailouts.

The BIS has essentially changed the way every single bank abiding by or transitioning to Basel III does business. Why? Because different types of loans require different levels of reserves held against them in case of default. Different types of equity offer different levels of capital the bank can use in calculating its compliance with Basel III.

This means that, without any democratic input, the BIS and everyone participating in the Basel III process has already imposed massive structural adjustments on how capital is allocated in literally every single country! The technocrats have already changed how every single bank in the world prepares its financial statements and manages its balance sheet! If that isn’t a technocratic imposition without reference to democratic processes I don’t know what is.

Why are banks happy to lend on houses but not to small businesses? Because they need higher loss reserves for business lending. Ergo, you can borrow a $1 million for a house but borrowing $1 million for a development to increase housing supply is almost impossible unless you already have $1 million in net assets as security, rendering the whole point of participating in the bank lending market moot and the likelihood of any economic recovery relying on credit negligible.

What does this have to do with Basel III? Well, with quantitative easing injecting enormous amounts of liquidity into the financial system at the same time that higher capital requirements and liquidity constraints have been imposed on banks and financial institutions, it simply makes more sense to keep stuff on your balance sheet in assets that enable you to count them as Tier 1 capital under Basel III rules. That is why financial institutions have returned to profitability so quickly.

Thus, in the pursuit of financial stability, the Basel III process has also made it less likely that loans will be granted to the risky activities that will bring the Western economies back into growth mode. There is a trade-off between financial stability and credit being allocated towards risky activities like business startups and property development.

Remember, when private sector demand for credit is down, and banks need to raise enormous amounts of capital to meet Basel III requirements, how focused will they be on performing their role as a capital allocation utility i.e. the reason they’re given banking licenses? How focused can you be on business development in property lending when you made big mistakes in the last boom and now have a whole plethora of new rules around who you can lend money to?

It’s almost as if the technocrats did not believe that there were any tradeoffs in pursuing policy that, funnily enough, I think the average person in the street would wholeheartedly approve of. Regulation has consequences. We should be very concerned that the Reserve Bank wants to increase its level of “macro-prudential supervision” through loan-to-value restrictions.