Category Archives: Finance

A Finance Retrospective of the 2000's

  • Investors Hope the ’10s Beat the ’00s, by Tom Lauricella
  • “Since End of 1999, U.S. Stocks’ Performance Has Been the All-Time Clunker; Even 1930s Beat It”.

    “Many investors realize that stocks have been among the worst investments of the past decade. But they may not realize quite how bad the decade was, because most people forget about the effects of inflation.”

    “The U.S. stock market is wrapping up what is likely to be its worst decade ever. In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s.”

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    A Finance Retrospective of the 2000’s

    • Investors Hope the ’10s Beat the ’00s, by Tom Lauricella

    “Since End of 1999, U.S. Stocks’ Performance Has Been the All-Time Clunker; Even 1930s Beat It”.

    “Many investors realize that stocks have been among the worst investments of the past decade. But they may not realize quite how bad the decade was, because most people forget about the effects of inflation.”

    “The U.S. stock market is wrapping up what is likely to be its worst decade ever. In nearly 200 years of recorded stock-market history, no calendar decade has seen such a dismal performance as the 2000s.”

    Assorted Links (11/4/2009)

    Here’s a list of articles that I have been reading today, accompanied in some cases with some of my own commentary (organized by topic):

    The Economy

    • In the Battle for Stimulus Jobs, Shoe Store Owner Tells War Story, by Louise Radnofsky

    Here’s a practical, step-by-step guide to “creating or saving” 9 jobs for only $889! Thanks to Greg Mankiw for the pointer! Professor Mankiw has previously written on “Create or Save“, where he notes, among other things, that while this “statistic” is politically clever, it is based upon counterfactual reasoning and not measurable in any meaningful sense.

    The White House uses this created or saved “metric” regularly; e.g., last Friday, the White House claimed that the $787 billion economic stimulus plan approved early this year “…has generated or saved more than 1 million jobs” and that “…it is on track to create or save 3.5 million jobs by the end of next year.” (Source: “White House: 1 million jobs created or saved”).

    Finance and the Financial Crisis

    • Is Market Efficiency the Culprit?, by Eugene Fama

    “Justin Fox (“The Myth of the Rational Market”) and many other financial writers claim that much of the blame for the financial meltdown is attributable to a misguided faith in market efficiency that encouraged market participants to accept security prices as the best estimate of value rather than conduct their own investigation. Is this a fair assessment? If so, how should policymakers respond?”

    Health Care Reform

    Professor Mankiw points out an important unintended consequence associated with the House of Representatives’ version of health reform unveiled last Thursday by Speaker Nancy Pelosi.  Specifically, the House bill imposes very high implicit marginal tax rates on labor income.  For example, a family of four earning $54,000 would pay only about 1/3 of the actual cost for health insurance. However, if that same family earns additional income of $12,000, then the health insurance subsidy falls by $3,800, which translates into an implicit marginal tax rate of 3,800/12,000 = 32 percent.  This is an implicit tax that must be “paid” on top off of all the other explicit (income and payroll) taxes which normally apply to $66,000 of personal income.

    Politics

    • Obama and the Liberal Paradigm, by John Stele Gordon

    “The sheep are quite capable of looking out for themselves. Someone tell the Democrats.”

    Executive Compensation Debate

    I would like to call everyone’s attention to a formal online debate concerning executive compensation which began on Tuesday, October 20 and is scheduled to conclude on October 30th.  Later in the semester, we’ll discuss how to structure compensation to align incentives between owners and managers of firms.  However, this debate, which is sponsored by The Economistaddresses the ongoing public controversy concerning whether senior executives are worth what they are paid. 

    Specifically, the motion reads as follows: “This house believes that on the whole, senior executives are worth what they are paid.”  The person defending the motion is Steven N. Kaplan, who is the Neubauer Family Professor of Entrepreneurship & Finance at the University of Chicago Booth School of Business.  Professor Kaplan may very well be one of the most widely published and prolific scholars on the topic of executive compensation.  The person who is against the motion is Nell Minow, who is Editor and Co-founder of The Corporate Library, which is an organization that bills itself as “…the leading independent source for U.S. and Canadian corporate governance and executive & director compensation information and analysis”.  Anyway, this debate should certainly be interesting to follow!

    57th Annual Management Conference 2009 on "The Future of Markets" at University of Chicago

    57th Annual Management Conference 2009 on “The Future of Markets”, held at the University of Chicago Booth School of Business, May 29, 2009.  Of particular interest is the 2 hour, 7 minute long keynote panel webcast featuring the following six University of Chicago faculty panelists:

    • Gary Becker, University Professor of Economics and of Sociology and winner of the 1992 Nobel Prize in Economics
    • Kevin Murphy, George J. Stigler Distinguished Service Professor of Economics
    • Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance
    • Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance
    • Marianne Bertrand, Fred G. Steingraber/A. T. Kearney Professor of Economics
    • Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance
    Click here for an executive summary of the keynote panel. For some context on the panel members, read the “Conference Pre-Reading“. Also, the discussion (roughly 1 hour long) featuring Ted Snyder and Gene Fama (from the same conference) on the question “Is the stock market an “efficient” market? is also very worthwhile (executive summary here). Ironically, even though the keynote panel and Fama webcasts took place nearly two months prior to the publication of the Economist cover article (dated 7/16/2009) entitled “What went wrong with economics (and how the discipline should change to avoid the mistakes of the past)”, these webcasts address many of the issues that were brought up in the Economist article.]]>

    57th Annual Management Conference 2009 on “The Future of Markets” at University of Chicago

    I would like to call attention to the 57th Annual Management Conference 2009 on “The Future of Markets”, held at the University of Chicago Booth School of Business, May 29, 2009.  Of particular interest is the 2 hour, 7 minute long keynote panel webcast featuring the following six University of Chicago faculty panelists:

    • Gary Becker, University Professor of Economics and of Sociology and winner of the 1992 Nobel Prize in Economics
    • Kevin Murphy, George J. Stigler Distinguished Service Professor of Economics
    • Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance
    • Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance
    • Marianne Bertrand, Fred G. Steingraber/A. T. Kearney Professor of Economics
    • Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance

    Click here for an executive summary of the keynote panel. For some context on the panel members, read the “Conference Pre-Reading“. Also, the discussion (roughly 1 hour long) featuring Ted Snyder and Gene Fama (from the same conference) on the question “Is the stock market an “efficient” market? is also very worthwhile (executive summary here). Ironically, even though the keynote panel and Fama webcasts took place nearly two months prior to the publication of the Economist cover article (dated 7/16/2009) entitled “What went wrong with economics (and how the discipline should change to avoid the mistakes of the past)”, these webcasts address many of the issues that were brought up in the Economist article.

    End the Corporate Income Tax!

    This is one of Megan McArdle’s ideas for “fixing the world”. She goes on to argue that:

    “At 35 percent, America’s levy on corporate income is one of the highest in the developed world. In 2007, about 2.5 million companies prepared lengthy returns at great expense, yet the tax generated only about 15 percent of total federal tax revenue. The tax on corporate profits discourages capital formation, targets shareholders regardless of their wealth, and fuels frantic, and costly, business efforts to dodge it. Among experts who study its effects, support for the tax is at best sort of sheepish.”

    The risk management literature actually has much to say about how the corporate tax code discourages capital formation.  Specifically, the asymmetric nature of the corporate income tax creates disincentives for firms to bear risk.  Tax asymmetries derive from two important features of the corporate income tax; specifically, tax rate progressivity and incomplete tax loss offsets.  Thus tax asymmetries incentivize firms  underinvest in risky (but potentially profitable) assets, which in turn limits the economy’s prospective growth potential. 

    Financial Times and Goldman Sachs Business Book of the Year Longlist

    Here’s the “longlist” for the 2009 Financial Times and Goldman Sachs Business Book of the Year Award. Apparently this list will get whittled down to a “shortlist” on September 17, and the “winner” will be announced at the end of October at a gala event in London.

    1. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A Akerlof, Robert J Shiller
    2. Clever: Leading Your Smartest, Most Creative People by Rob Goffee, Gareth Jones
    3. Free: The Future of a Radical Price by Chris Anderson
    4. Good Value: Reflections on Money, Morality and an Uncertain World by Stephen Green
    5. House of Cards: A Tale of Hubris and Wretched Excess on Wall Street By William D Cohan
    6. How the Mighty Fall: And Why Some Companies Never Give in by Jim Collins
    7. Imagining India: The Idea of a Renewed Nation by Nandan Nilekani
    8. In Fed We Trust: Ben Bernanke’s War on the Great Panic by David Wessel
    9. Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed
    10. The Match King: Ivar Kreuger, the Financial Genius Behind a Century of Wall Street Scandals by Frank Partnoy
    11. The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox
    12. Supercorp: How Vanguard Companies Create Innovation, Profits, Growth, and Social Good by Rosabeth Moss Kanter
    13. This Time Is Different: Eight Centuries of Financial Folly by Carmen M Reinhart, Kenneth Rogoff
    14. Waste: Uncovering the Global Food Scandal, by Tristram Stuart
    15. Why Your World Is about to Get a Whole Lot Smaller: Oil and the End of Globalization by Jeff Rubin

    I have read only two of the books on the list (cf. items 5 and 11 below), so it looks like I have some catching up to do!

    The ft.com article entitled “Reading into financial crises past, present and future” provides a useful synopsis of these books.