So it was 1990 that the New Zealand central bank became the first in the world to impose an inflation target of 0-0.002....Econospeak
Adam Smith famously wrote of the “invisible hand,” by which individuals’ pursuit of self-interest in free, competitive markets advances the interest of society as a whole. And Smith was right: Free markets have generated unprecedented prosperity for individuals and societies alike. But, because we can be manipulated or deceived or even just passively tempted, free markets also persuade us to buy things that are good neither for us nor for society.
This observation represents an important codicil to Smith’s vision. And it is one that George Akerlof and I explore in our new book, Phishing for Phools: The Economics of Manipulation and Deception…Sounds interesting and timely.
On a day of equity market plunges around the world, it seems timely to recommend the new book from George Akerlof and Bob Shiller, Phishing for Phools: The Economics of Manipulation and Deception. Princeton University Press have put the introduction online for free.…The Enlightened Economist
[Michael] Jensen's best-known work is the 1976 paper he co-authored with William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,[3] one of the most widely cited economics papers of the last 30 years. Besides reigniting interest in the theory of the public corporation as an owner-less entity made up of only contractual relationships (a field pioneered by Ronald Coase), the paper laid the foundation for the widespread use of stock options as executive compensation tools.
It was a 1990 Harvard Business Review article CEO Incentives: It's Not How Much You Pay, But How[4] by Jensen and Kevin J. Murphy that prescribed executive stock options in order to maximize shareholder value. The justification they gave was that shareholders were the "residual claimants" of the corporation, meaning that they had the sole right to profits. This idea that shareholders are residual claimants was later rejected by legal scholars (e.g., Stout 2002).
After Jensen and Murphy (1990), Congress passed a law,[5] making it cost effective to pay executives in equity. As a result, executives focused their efforts on increasing stock price. In the short run, many executives manipulated accounting numbers (e.g., Enron, Global Crossing).NYT article 2005 In the long run, executives outsourced labor to reduce costs, then used the cost saving to repurchase stock; thus, increasing their own compensation. Over the last 20 years, stock buybacks total a few trillion.[6Bill comments:
In some ways, however, it was remarkable that the intellectual father of modern executive compensation, Michael Jensen, has turned on his creation. Further, he turned on it vehemently – in 2001. Subsequently, scholars whostudy executive compensation have agreed that it has created perverse incentives.New Economic Perspectives
I received a message last week from a savvy reader, a former McKinsey partner who has also done among other things significant pro-bono work with housing not-for-profits (as in he has more interest and experience in social justice issues than most people with his background). His query:
We both know that financialization has, among so many other things, turned large swaths of the capital markets into a casino
Here’s my thought/question: is there a house?
The common wisdom is that the ‘house wins’ in casinos
In all likelihood, at least in the great financial crisis, the TBTF banks were the ‘house’… yet, it’s at least a bit different from a casino house because, absent the bailouts, those banks would not have won.
So, who or what was really the ‘house’? Was it the Fed? Did the Fed actually ‘win’?
Naked CapitalismMaybe the ‘house’ is the 1% …. or, more precisely, the .01%???
This is the first installment of a series of articles about the media, finance industry, political, and Department of Justice (DOJ) reaction to Michael Lewis’ new book about high frequency trading (HFT). The media ballyhooed the book as if it were an amazing revelation of a fact of surpassing importance. The industry demonized the book and Lewis. DOJ immediately announced it had begun a criminal investigation and the SEC it had multiple investigations pending. Whether the industry or Lewis is correct about HFT practices (which he asserts are lawful) is unimportant for some purposes. My series will focus on the difference between the frenzied DOJ, political, and media reaction to Lewis’ criticism of allegedly lawful HFT practices and the “yawn” reaction of these same groups to the vastly more damaging criminal frauds runs by our elite financial leaders that caused the financial crisis is astronomical, ludicrous, and disastrous. Similarly, the reaction of these three groups to the finding by multiple investigations that 16 of the largest banks in the world committed crimes by setting LIBOR rates through frauds and cartels (the largest cartel, by several orders of magnitude, in history) was less than a yawn, as I described in prior articles.New Economic Perspectives
The media honeymoon is definitely over for new Federal Reserve chief Janet Yellen. The Journal reports a potential conflict of interest created by her husband George Akerlof serving on the advisory board of an academic center funded by the Swiss bank UBS, which will soon come under closer Fed supervision.American Banker
Why do people like Tyler Cowen still equate wealth with merit? Many rich people are just crooks....
Tyler Cowen’s new book Average is Over: Powering America Beyond the Age of the Great Stagnation warns that inequality will only get worse as a "hyper-meritocracy" of smart, energetic people at the top commanding machines and data speed ahead and the lazy, not-very-bright folks at the bottom fall further behind.
One thing seems to be left out of the discussion: those hyper-meritocrats are led by criminal morons.
Cowen’s embrace of Social Darwinism assumes that the winners have a selective advantage that arises from “merit” – which Cowen conflates with the ability to create wealth. This is passing strange as we are still suffering from an orgy of wealth destruction led by the “winners.” The people who grew wealthiest were often the people must responsible for the largest destruction of wealth in history. That it is an anti-meritocratic system. We do not live in a “winner-take-all” nation. We increasingly live in a “cheater-take-all” system.AlterNet
There are at least four principles that virtually all conservatives purport to support – except when the potential defendant is socially elite. I have written previously about two of these principles on several occasions – the need for accountability and “broken windows” theory that calls for the prosecutors to make the prosecution of even minor street crimes a high priority if they have, even indirectly, a material effect on the community.
The third principle is that it is vital to punish in order to deter crime.....New Economic Perspectives
The fourth principle, the one this column addresses, is the conservative love of “creative destruction” – a concept made famous by the economist Joseph Schumpeter. I have a simple proposition – there is no more creative destruction than putting a control fraud out of business through a prosecution, receivership, or enforcement action....
Conservative scholars love (purported) “private market discipline.” This is the theory that creditors will promptly destroy any control fraud. The problem is that creditors actually fund the massive growth of control frauds rather than “disciplining” them. Control frauds report extreme profits. In the case of accounting control frauds these reported profits are fictional, but the creditors love to fund their growth. In the case of other forms of control fraud the supra-normal profits produced by the fraud are real, so private market “discipline” is a complete oxymoron. The creditors eagerly fund these other forms of control fraud because of their highly profitable frauds.
If you have studied economics at the university level in the last 35 years, it is likely you were introduced to the concept of "asymmetrical information" and George Akerlof's famous 1970 article on markets for "lemons" (American slang for an automobile of terrible quality). The Nobel committee that awards the prize in economics singled out that article for special praise in deciding to make him a Nobel Laureate in 2001. The article discusses the implications of asymmetrical information in a number of contexts, but at least two of the contexts involved what criminologists call "control fraud" and a third involves the risk of fraud by borrowers.
Most of the examples Akerlof discussed involved fraud. The frauds he analyzes concern deceit about the quality of goods being sold or the borrowers' ability or willingness to repay a loan.
I have noted in many articles that the clan of economists has a primitive tribal taboo against saying the mystic "f" word out loud or even putting it in print, so Akerlof's article does not contain the word "fraud." His language, however, makes it clear that he is discussing fraud and how it can create what we now call a "Gresham's dynamic" in which bad ethics drives good ethics out of the market.
The theme of my article is to alert the reader to other variants of anti-purchaser control fraud in which the deception about the quality of the goods sold (or rented) affects safety, not simply the appropriate price of the bad quality goods. I use as my example the recent deaths of nearly 400, and over 1,000 injured, Bangladeshis when the building they were working in collapsed. I show that the same case is also an example of anti-employee control fraud.
The nature of the survivors' injuries is often horrific.The Huffington Post
