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Finance and economics
Updated: 30 min 48 sec ago

The teaching of economics gets an overdue overhaul

Thu, 09/21/2017 - 14:44

ECONOMISTS can be a haughty bunch. But a decade of trauma has had a chastening effect. They are rethinking old ideas, asking new questions and occasionally welcoming heretics back into the fold. Change, however, has been slow to reach the university economics curriculum. Many institutions still pump students through introductory courses untainted by recent economic history or the market shortcomings it illuminates. A few plucky reformers are working to correct that: a grand and overdue idea. Overhauling the way economics is taught ought to produce students more able to understand the modern world. Even better, it should improve economics itself.

The dismal science it may be, but economics is popular on campus. It accounts for more than 10% of degrees awarded at elite universities each year, by one estimate, and many more students take an introductory class as part of their general-education requirements. Teachers of such courses aim to grab the attention of their glassy-eyed...

Norway’s sovereign-wealth fund passes the $1trn mark

Thu, 09/21/2017 - 14:44

A year earlier than expected, Norway’s sovereign-wealth fund, the world’s largest, surpassed $1trn in assets on September 19th. It had gained over $100bn in the past year, thanks in large measure to the global stockmarket boom in 2017: around two-thirds of its assets are held as equities (over 1% of shares globally). It helps that Norwegians continue to earn fat revenues from pumping North Sea oil and gas, which go to the fund to be invested abroad. The fund is so big it is becoming a tool for 5m-odd Norwegians to shape values abroad. It is an increasingly activist shareholder, speaking out on executive pay, ethical behaviour, companies’ use of water, child labour and more. Both its size and influence are likely to keep on growing.

Ukraine’s return to the debt markets worries economic reformers

Thu, 09/21/2017 - 14:44

MUCH has changed since Ukraine last tapped global debt markets in 2013. The next year the “Maidan revolution” drove out the corrupt regime of Viktor Yanukovych; and Russia annexed Crimea and stoked a war in Ukraine’s east. The economy languished, with GDP contracting by 16% in 2014-15; only an IMF rescue staved off collapse. Unable to pay its debts, Ukraine in 2015 submitted its creditors to a 20% “haircut”, or debt reduction (an offer rejected by just one creditor, Russia, which is pursuing Ukraine in British courts). This week the government returned to the international markets, issuing $3bn in dollar-denominated bonds.

This testifies to the progress Ukraine has made. As Oleksandr Danylyuk, the finance minister, puts it: “We’re back; we transformed the country.” The government has largely stabilised the economy, bringing inflation down from a peak of 61% in April 2015 to a more manageable 13.5%. It has also undertaken structural reforms: overhauling energy markets,...

Ethical investment is booming. But what is it?

Thu, 09/21/2017 - 14:44

MAYBE weary of its role as a punchbag for moralists, and certainly in search of products with widespread appeal, Wall Street has taken to selling products linked to virtue. That is not easy: how does an industry focused on financial returns go about gauging goodness?

The approach started years ago with funds that called themselves “socially responsible”. More recently the terminology has evolved, with many claiming to pursue “ESG” investing, standing for “environmental”, “social” and “governance”.

Morningstar, a data-tracking firm, places any fund that uses terms such as sustainable investing, ESG and so on in its prospectus into a category that now has 204 members with $77bn in collective assets. The oldest fund in the Morningstar group dates back to 1971. But nearly half have been launched in the past three years. More quietly, the wealth-management offices of many American investment firms constantly roll out investments touting these sorts of characteristics and...

Huge volumes of data make real-time insurance a possibility

Thu, 09/21/2017 - 14:44

Mind your heads

EVEN at weddings or whale watches, the buzz of a drone is no longer a surprise. Drone photography is booming. Gartner, a consultancy, says some 174,000 drones will be sold for commercial use around the world this year, and 2.8m to consumers. It is easy to imagine a few might fall out of the sky, causing damage the pilot cannot hope to pay for: crushed wedding cakes, injured spectators and so on. Amid scores of near-misses, several incidents have already occurred. In 2014, for example, a drone filming a triathlon in Australia crashed on a competitor’s head.

Clearly, drone-users need insurance. Typically, risks are insured through the payment of an annual premium. Insure4drones, a British specialist, charges £738.86 ($1,000) to cover a DJI Phantom, a bestselling drone, for a year. From October Flock, a London startup, will offer insurance on a flight-by-flight basis, at the push of a button in an app, to any commercial drone-operator in...

Marital choices are exacerbating household income inequality

Thu, 09/21/2017 - 14:44

It’s all a matter of degree

“HERE’S what nobody is telling you: Find a husband on campus before you graduate,” wrote Susan Patton, a human-resources consultant, in 2013. In an infamous letter to the editor of Princeton’s student newspaper, Ms Patton warned female students at the university that they will “never again be surrounded by this concentration of men who are worthy of [them]”. Critics responded harshly. Ms Patton recalls that she was branded “a traitor to feminism, a traitor to co-education and an elitist”.

Economists might offer yet another critique of Ms Patton’s letter: it was largely unnecessary. It is clear to academics that people tend to marry spouses with similar levels of education. They also know that “assortative mating”, as the practice is called in the jargon, is exacerbating income inequality. In America, Britain, Denmark, Germany and Norway, they have found that household income would be more evenly spread if couples were less keen...

America holds the World Trade Organisation hostage

Thu, 09/21/2017 - 10:03

EIGHT months into Donald Trump’s presidency, the rules-based system of global trade remains intact. Threats to impose broad tariffs have come to nothing. Some ominous investigations into whether imports into America are a national-security threat are on hold. Mr Trump looks less a hard man than a boy crying wolf. All the same, supporters of the World Trade Organisation (WTO), the guardian of that rules-based system, are worried. Other dangers are lurking. There is more than one way to undermine an institution.

The WTO is meant to be a forum for reaching deals and resolving disputes. But all 164 members must agree to new rules, and agreement has largely been elusive. So if members do not like today’s rules, as interpreted by judges, they have little prospect of negotiating better ones. That puts pressure on the WTO’s judicial function, the bit that has been working fairly well.

Trouble is brewing at the WTO’s court of appeals. It is meant to have seven serving...

China sets its sights on dominating sunrise industries

Thu, 09/21/2017 - 09:18

IN RECENT days China set the record for the world’s fastest long-distance bullet train, which hurtled between Beijing and Shanghai at 350kph (217mph). This was a triumph of industrial policy as much as of engineering. China’s first high-speed trains started rolling only a decade ago; today the country has 20,000km of high-speed track, more than the rest of the world combined. China could not have built this without a strong government. The state provided funds for research, land for tracks, aid for loss-making railways, subsidies for equipment-makers and, most controversially, incentives for foreign companies to share commercial secrets.

High-speed rail is a prime example of the Chinese government’s prowess at identifying priority industries and deploying money and policy tools to nurture them. It inspires awe of what it can accomplish and fear that other countries stand little chance against such a formidable competitor. Yet there have also been big industrial-policy misses,...

Stanley Fischer and the twilight of technocracy

Thu, 09/14/2017 - 14:54

IN 2004 Stanley Fischer described the wonder he felt as an economics student in the 1960s. “You had a set of equations”, he said, “that meant you could control the economy.” Technocracy—the dream of scientific government by a caste of wise men—arose in the 20th century, as rapid change rendered the world unfathomably complex; in economics, it came of age in the Keynesian revolution of the 1930s. On September 6th, after a remarkably distinguished career in public service, Mr Fischer, an intellectual heir to Keynes, announced his imminent retirement as the vice-chairman of the Federal Reserve. It is tempting to see in his departure the end of the era and the ideal of technocracy.

A century ago, as physicists unlocked the secrets of the atom and biochemists probed the molecular basis of life, economists sought to systematise their own field. But the growing complexity of their work created a problem: laymen could not make head or tail of it. Government consultation with experts, or the...

Goldman Sachs announces a change in strategy

Thu, 09/14/2017 - 14:54

IT IS not easy to feel pity for Goldman Sachs. Its alumni lord it in pivotal government positions around the world; from every prestigious business school, applicants queue in hope of a job; its senior executives earn eye-watering amounts; and it has a presence, it seems, in every corner of the global economy. Yet these are troubling times for the bank. It is facing fundamental questions about its business model.

Its investors are particularly worried by a precipitous decline in the fortunes of its core fixed-income, currencies and commodities unit (FICC). That is the business from which Goldman’s current leadership graduated. The bank’s president, Harvey Schwartz, used a conference on September 12th to give an unusually detailed account of how it is changing. He outlined plans for igniting growth in an apparently stagnant business, and for preserving profitability despite that stagnation.

One factor in Goldman’s problems has been a change in its staff structure. In the...

The Fed prepares for its balance-sheet—and its board—to shrink

Thu, 09/14/2017 - 14:54

NINE years ago, in the autumn of 2008, the Federal Reserve was fighting a financial collapse. To stave off disaster, it lent aggressively—to banks, to money-market funds, even to other central banks. As a result, its balance-sheet ballooned. At the start of September 2008, the month when Lehman Brothers collapsed, the Fed’s assets totalled $905bn (at the time, about 6% of GDP). By December they had more than doubled in size, to $2.1trn. That was only the start. As its emergency lending unwound, the Fed began purchasing government debt and mortgage-backed securities (MBSs), in an attempt to support the real economy. Three volleys of so-called “quantitative easing” (QE) eventually swelled the balance-sheet to $4.5trn by 2015.

On September 20th the Fed will probably announce that it is putting QE into reverse. It does not intend to sell its assets. Rather, as its securities mature, it will stop reinvesting all of the proceeds. The permitted monthly “run-off” will gradually rise until...

Retail banks’ foreign ventures rarely pay off

Thu, 09/14/2017 - 14:54

NOT everybody—or every business—travels well. Retailers from Walmart to Tesco have faltered in forays into foreign lands. Banks, too, often fancy that success at home can be reproduced abroad. In meeting the needs of big companies, they are often right. Global corporations seem to want global banks. But in retail banking, serving households and small businesses, they are usually mistaken.

Or so concludes a report by Lorraine Quoirez and her colleagues at UBS, examining the performance of seven international banks (BBVA, Citigroup, HSBC, ING, Santander, Société Générale and Standard Chartered). For several measures, such as net interest margins and returns on equity, the Swiss bank’s analysts constructed benchmarks for each firm. The benchmarks are the averages for all banks in countries where the seven are active, weighted by the importance of each market in each bank’s loan book.

Most of the banks fall short on most measures. For example, UBS expects...

Putting a new face on an American banknote is oddly difficult

Thu, 09/14/2017 - 14:54

IT WOULD be hard to find a better example of long-term gridlock in Washington than its treatment of banknotes, whose appearance has essentially been frozen since 1929. The administration of Barack Obama took a half-hearted step towards a new look, proposing the replacement of Alexander Hamilton’s portrait on the $10 bill with a portrait of Harriet Tubman, a former slave who became a civil-war hero.

Problems cropped up at once. It seemed ludicrous to scrap the portrait of the one person on a note who helped create America’s financial system. It did not help that he was also the hero of a smash-hit Broadway musical. So the administration decided instead to replace Andrew Jackson, America’s seventh president, on the $20 bill. But by then it was too close to the election to push the change through.

President Donald Trump has since lent his support to keeping Jackson. In a recent interview, his treasury secretary, Steven Mnuchin, made it clear he had little interest in...

How to protect yourself against the theft of your identity

Thu, 09/14/2017 - 14:54

AS IDENTITY theft has proliferated, so has the number of businesses hoping to make money selling protection against it. Companies such as LifeLock, Identity Guard and PrivacyGuard sell products similar to Equifax’s TrustedID Premier identity-theft protection. That was the service Equifax offered to every American with a Social Security number in the aftermath of its big data breach.

Those who enroll in TrustedID are promised notification if their information is offered for sale on the internet. Their credit reports with Equifax, Experian and TransUnion, the “Big Three” credit-reporting agencies (CRAs), are also monitored for suspicious activity, such as the opening of new accounts or failures to pay a bill on time. If such activity is detected, users can “freeze” their Equifax credit reports, ie, make them unavailable to lenders. And TrustedID offers $1m-worth of insurance to compensate users for losses incurred as a result of identity theft. Equifax is offering the service free for...

The big data breach suffered by Equifax has alarming implications

Thu, 09/14/2017 - 14:54

UNTIL something goes wrong, few people give much thought to the surveillance they undergo by credit-reporting agencies (CRAs). Yet these agencies’ business is deeply intrusive: quantifying character. They assign individuals credit scores based on how they previously managed debt. The scores are then sold to lenders. In America, Equifax, Experian and TransUnion, the “Big Three” CRAs, have gathered credit histories and identifying information for nearly every adult.

On September 7th Equifax admitted that something had indeed gone very wrong: hackers had gained access to personal information on about 143m people, mostly Americans. It reported that, from mid-May to July, hackers exploited a vulnerability in its website. The data compromised included Social Security numbers (SSNs), dates of birth and driving-licence numbers, and for 209,000 people, possibly their credit-card numbers as well. Equifax also noted that data about some Britons and Canadians may have been stolen.

The...

Initial Coin Offering means investor caution obligatory

Tue, 09/12/2017 - 14:50

HERE is the deal. You can buy an entry in a computer ledger issued by a startup company on the basis of an unregulated prospectus. It is called an “initial coin offering” or ICO. But though the ledger entry is called a coin, you cannot spend it in any shop. And whereas the use of the term ICO makes it sound like an IPO (initial public offering), the process whereby a firm lists on a stockmarket, coin ownership does not necessarily get you equity in the company concerned.

This sounds like the kind of bargain that would appeal only to people who reply to e-mails from Nigerian princes offering to transfer millions to their accounts. But ICOs may well be the most popular investment craze since the dotcom boom of 1999-2000; even Paris Hilton, a celebrity heiress, has jumped on the bandwagon. The list of active, upcoming and recent ICOs on the website “ICO alert” covers 31 pages of A4 paper and includes around 600 companies. More than $2bn has been raised in total.

There is a serious side to the craze, just as there was with the dotcom boom. The technology that underpins digital currencies—the blockchain—is an important development. This is a secure, decentralised ledger that everyone can inspect but that no single user controls. It seems likely to be adapted for use across the financial system—to record property transactions...

Capacity cuts in China fuel a commodity rally and a debate

Thu, 09/07/2017 - 14:44

STEEL ran in Zhang Cheng’s family for three generations. His grandfather mined iron ore. His father got a job in the big state-owned steel mill just outside Jinan, capital of Shandong province. His mother worked in the on-site hospital. And Mr Zhang went to the mill-run school, graduating to a job in its foundry, where, in the heat of the blast furnace, he rolled metal into thin bars for construction. But after nearly two decades in Jinan Steel, he worked his last day there this summer. In the name of “capacity reduction”—a government policy to rein in excess production of steel—the plant stopped operating in July, and Mr Zhang went on the dole.

Since they worked for a state-owned company, the local government has helped him and the 20,000 others who lost jobs find new ones. But it has been a struggle for Mr Zhang, a soft-spoken man. Openings in Jinan are mainly in the service industry—as a waiter in restaurants or an attendant at a station on the new underground. He worries that he...

Why are investors so relaxed about the tensions in Korea?

Thu, 09/07/2017 - 14:44

A ROGUE state has tested what may be a hydrogen bomb and has sent a missile over the territory of a neighbouring country. The American president has promised “fire and fury” if threats continue. The Security Council of the United Nations has been locked in debate. This sounds like the plot of a Hollywood thriller or a paperback potboiler in which the world is heading for conflagration.

But international investors are not thrilled, and seem barely disconcerted, by the crisis on the Korean peninsula. Gold has risen a bit, the yield on Treasury bonds has dropped and the MSCI World equity index has fallen since the start of August. However, the moves have not been huge. Even the South Korean stockmarket, surely the most sensitive gauge of war risk, is well above its level at the start of the year.

What explains this remarkable insouciance? One possibility is that the markets may simply not be very good at assessing political risk. After all, investors failed to foresee either...

A new bond taps private money for aid projects in war zones

Thu, 09/07/2017 - 14:44

A giant leap for impact investing

INVESTORS might be expected to run a mile from a deal on offer in a conflict-torn part of Africa. At best, it will pay an annual return of 7%; at worst, 40% of the original investment is lost. But a dozen social investors have pooled SFr26m ($27m) to finance the world’s first “humanitarian impact bond”, issued by the International Committee of the Red Cross (ICRC). It will pay for three rehabilitation centres to be built and run in the Democratic Republic of Congo, Mali and Nigeria.

The ICRC’s obligations are backed by “outcome funders”, ie, donors, mostly governments. The bond is an example of “impact investing”, in which private investors seek out social and financial returns, and of “blended finance”, in which public funds help them to do so. Variants have included a bond aimed at educating girls in India and a World Bank-led initiative to raise money to respond to pandemics. The novelty in the ICRC’s bond is that the...

Governments need to rethink their attitudes to debt

Thu, 09/07/2017 - 14:44

GOVERNMENTS do not always make the best budget managers. Assuming it avoids an accidental debt default, America will run a bigger budget deficit this year than the last, despite a booming economy. Germany runs a surplus—but scrimps on critical investments and annoys its euro-area neighbours in the process. Japan, cowering under a mammoth public-debt pile, is weighing raising its consumption tax, though the last rise strangled a tenuous economic recovery. It is awkward, therefore, that the role of fiscal policy as a recession-fighting tool is only growing. The next downturn will be a painful and dangerous learning experience for many politicians.

When that comes, at some point in the next few years, the initial policy response is easily foreseeable. Central banks, nimbler than parliaments, will again move first. But markets reckon that two years from now the Fed’s benchmark rate will remain below 2%, the Bank of England’s below 1% and the European Central Bank’s close to zero. Rates can only go so negative before people abandon the banking system for cash. So cuts to interest rates will be limited. By contrast, in the relatively mild recession of 2001 the Fed cut rates by more than six percentage points. Central-bank asset purchases will follow, assuming they are not already happening, as they might well still be in Europe and Japan. Their effects will be less...

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