No fiddling while Rome burns

Anyone who’s been concerned at the size of executive remuneration at financial firms will be excited to hear about Credit Suisse’s latest move. Rather than allowing its executives to fiddle as their mortgage backed security investments cause the balance sheets to go up in flames, CS is paying its executives bonuses in illiquid mortgage-backed securities.

I wonder if, given the risk associated with those assets, their bonuses will be correspondingly higher. I wouldn’t want to be the one explaining to shareholders that bonuses were surprisingly high this year, but it’s actually OK because…[drowned out by lynch mob]

ht: Megan McArdle

Arnold Kling, asymmetric information, and the crisis

Arnold Kling from Econlog posts a passage from Michael Bordo approvingly. Specifically I enjoyed this part:

A key dynamic in the crisis stressed by Mishkin(1997) is information asymmetry, manifest in the spread between risky and safe securities, the consequences of which(adverse selection and moral hazard) are ignored in the boom and come into play with a vengeance in the bust.

So it appears they they both agree that asymmetric information is the key factor turning the current adjustment into a crisis (this is a belief that we share).

I would add one thing. Personally, I don’t just think it is “irrational exuberance” that leads to asymmetric information losing weight during a boom. I think that institutions form (reputations, organisations and the such) which appear to take care of the asymmetric information problem. However, when the downturn comes, and we discover that some of these institutions no longer exist/function we end up with a collapse.

Investment banks as flattery machines


Were investment bankers successful because they made their investors feel smarter for investing with them?

Buy low, sell high

With the official cash rate set to fall even further later this week, shares become relatively appealing when compared with other financial instruments, such as bonds and term deposits.

The old adage of ‘buy low, sell high’ seems fitting, given the battering shares the world over have taken in the past while. The NZX and Dow Jones industrial averages, for example, are both down around a quarter from their respective values six months ago.

But just when is the market ‘low’?

I don’t know! If I did, I’m sure I’d be a lot wealthier than I am. However, I thought it would be useful to write a blog entry to stimulate discussion and debate on what TVHE readers are picking for the sharemarket:

  1. Is now a good time to buy?
  2. What industries/companies would you consider investing it?
  3. What factors are influencing your decisions to invest, or not?

I look forward to hearing our readers’ views on the current state of the sharemarket.

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The Greens understand economics

Or so Russel Norman said when asked by Paul Henry earlier this week what the most common misconception about the Greens is. What do you think? I’m going to try a poll for the first time ever on tvhe, hopefully it works:)

I somehow stumbeled across this article from the greens (don’t ask me how..) which I think illustrates their understanding of economics

I’ll be honest and admit I stopped reading the article after the paragraph i’m about to reproduce so I’m open to accusations of trolling, but this was little gem

“Reducing saving by cutting KiwiSaver is the same as increasing debt. It won’t show on the Government’s balance sheet, because Key has swapped Government debt for private debt. Lower savings will show up on households’ balance sheets as increased private debt, which is already too high,” Ms Fitzsimons says.

Two points here:

Read more

More evidence of asymmetric information?

Over at Market Movers, Felix Salmon discusses “Lehman’s Lies“.

In the wake of the collapse, it was clear that if Lehman couldn’t be trusted, then it would be silly to trust any other troubled financial institution, either — AIG, WaMu, Wachovia, Fortis, Hypo Real Estate, you name it.

This breakdown in “trust” destroyed the delicate equilibrium we were in, and has sent us spinning towards a worse set of outcomes.

Fundamentally, this has happened because “trust” (the fact that we would be playing a “infinitely” repeated game, which then rewards people for collusive behaviour) had allowed us to bypass the asymmetric information problem inherent in the market. With that trust gone, no-one will lend or purchases assets, as they think that only the worst deals are available on the market.

In this light, the behaviour of Lehman appears to be a major factor behind the crisis we now find ourselves in – damned investment banks 😛