Seniors and Savings

Bo Becker in Geographical Segmentation of US Capital Markets shows that local savings has a positive effect on commerical lending.  He instruments loan supply using senior citizens who tend to save more in local banks.  His results are robust to every objection I could raise.  If the results hold for the baby boom generation our local financial institutions should see increased savings.  Could baby boomer savings reverse the long term decline in US savings rate and provide capital for small businesses? 

Proxy Fight Example

If you are teaching business finance and looking for a good example of a proxy fight for class discussion  see the following article from the WSJ.  A hedge fund, Harbinger Capital Partners Funds is attempting to gain a presence on the board of directors of the New York Times.  To make the case even more interesting the Sulzberger family controls the 7 of the 13 directors through another class of stock. 

Resource Curse or Debt Overhang

Famously, economists discovered that for countries there is a negative correlation between endowment of natural resources and economic growth. Many channels have been proposed for the effect. Manzano and Rigobon, in Resource Curse or Debt Overhang?, propose a financial channel: if you control for indebtedness the effect disappears. Having large amounts of natural resources provides collateral, which makes it easier for a country to borrow excessively.

Vacation as Theft Prevention

At Naked Capitalism, I just learned an interesting institutional detail: one strategy that investment banks use to prevent fraud by traders is to require mandatory vacations. Since fraud usually requires ongoing activity, it is impossible to keep one going while out of the office. Yves felt this was so common-sensical that he called it Trading 101.

The Minsky Moment

There’s been a lot of talk lately that we are in a “Minsky moment”, a reference to the ideas of Hyman Minsky, who argued that financial markets can create economic instability. For a summary of Minsky’s ideas, see this article in the New Yorker.

Societe Generale and the Fed Rate Cut

Felix Salmon speculates here and here that Societe Generale’s was the proximate cause of the Fed’s big rate cut. He argues that it was SG unwinding its large fraudulently hedged positions that spooked worldwide financial markets, which led to the rate cut.

Trader Losses and Liquidity

An academic reference which is related to the recent trader losses is The Paradox of Liquidity by Stwart C. Myers and Raghuram G. Rajan.  The paper models how when liquidity increases to a high threshold the borrower has a higher incentive to engage in moral hazard.   The borrower’s incentive is also to engage in moral hazard at low levels of liquidity as the lender has very little recourse if the collateral is illiquid. 

Societe Generale is hiring

Societe Generale SA announced today that a single trader lost $7.2 billion on stock index futures.  According to the head of the investment banking unit, four or five people would be fired, so get those resumes ready!

Introduction to Economic History

Brad de Long and Jan de Vries are teaching an introduction to economic history. A list of all of the class readings, including links, is available online.

Three-Quarter Point Rate Cut

The big news today, obviously, is the Fed’s eye-popping 75 basis point rate cut. I wonder if they had the last FOMC to do all over again, they wish they had cut a half point when they had the chance.