Wall Street Journal to Convene Financial Leaders for Its Future of Finance Initiative - MSNBC Wire Services - msnbc.com

Wall Street Journal to Convene Financial Leaders for Its Future of Finance Initiative - MSNBC Wire Services - msnbc.com:

"The Wall Street Journal today announced it will host the 'Future of Finance Initiative,' a working session that brings together top leaders and thinkers in global finance to identify the basic principles on which a new financial system must be reconstructed. The Journal's financial editors and reporters will moderate the discussions, which will be held March 23-24 in Washington, D.C."

The Future of Finance Initiative will feature the following financial leaders:

(Long list including:
* Robert E. Rubin, former U.S. secretary of the Treasury, director
 and former senior counselor, Citigroup Inc.
* Myron S. Scholes, Frank E. Buck professor of finance, emeritus,
 Stanford Graduate School of Business
* Robert J. Shiller, Arthur M. Okun professor of economics, Yale
 University"

Finance Test Questions

Studying for a test? Want to test yourself on a finance? This hopefully will be a way to do that.

It is a wiki-page that will allow anyone to post questions and answers to share with others. This will allow professors to have more test questions for their tests and students the opportunity to study by quizzing themselves.

FinanceTestquestions » home:

And remember if you are one of my students and you submit questions that are accepted, you will get 2% added to your test score. (and hopefully you will also get the question correct ;) )

Please no copyrighted material.

Behavioral Personal Finance: Customers' Fixation On Minimum Payments

Anchoring is a term often discussed within the realm of Behavioral Finance. Like its closely related sibling heuristics (or using rules of thumb), Anchoring may lead us to expect that a stock price will go back to a previous high just because we remember it being there. It also can give high priced stocks the appearance of being better than low priced stock. Here is an interesting look at what I guess I would call Behavioral Personal Finance.

Customers' Fixation On Minimum Payments Drives Up Credit Card Bills:

"The research, by University of Warwick Psychology researcher Dr Neil Stewart, is to be published in Psychological Science, in a paper entitled “The Cost of Anchoring on Credit Card Minimum Payments”. It focuses on the psychological phenomenon of “anchoring” in which arbitrary and irrelevant numbers bias people's judgments. The research reveals that anchoring affects the way people repay their credit card bills. For those people who make only partial repayments of the outstanding balance (about 35% of card holders), the suggested minimum payment on the credit card statement acts as an anchor and lowers the actual repayments people choose to make."

BTW here are some more behavioral finance posts if you are interested. If you are interested in the field (and I have no idea how you would not be!), Wikipedia has a pretty good intro, but if you have just a bit more time both Jay Ritter and Behavourial Finance.net (Martin Sewell) have excellent "primers" on the field. (HT to Simoleonsense.com)

Warren Buffett speech to MBA Students from a few years ago

In my financial case class (Fin 402) we will be doing a case study on Warren Buffett. In class I mentioned the video presentation of Buffett and Bill Gates when he was at the University of Nebraska. I went looking for it and I found this one. It is very good. It is a talk he gave at the University of Florida. Definitely recommend watching. It is long (over an hour) but well worth it. Have it on as you do something else.


He talks about integrity, why you have to like your job, the unimportance of money for happiness, his misgivings about Beta, barriers to entry, valuation, and much more. (He even has a final test question, mmm, wonder if I should use it!)

FRB: Speech--Bernanke, Federal Reserve Policies to Ease Credit and Their Implications for the Fed's Balance Sheet--February 18, 2009

What a great recap of the Fed's actions over the past year or so. Great read. It is Bernanke at his best.

FRB: Speech--Bernanke, Federal Reserve Policies to Ease Credit and Their Implications for the Fed's Balance Sheet--February 18, 2009:

"We live in extraordinarily challenging times for the global economy and for economic policymakers, not least for central banks such as the Federal Reserve. As you know, the recent economic statistics have been dismal, with many economies, including ours, having fallen into recession. And behind those statistics, we must never forget, are millions of people struggling with lost jobs, lost homes, and lost confidence in their economic future.....Traditionally the most conservative of institutions, central banks around the world have responded to this unprecedented crisis with force and innovation"

He goes on to explain what the Fed has done and why. For instance:

"Policy innovation has been necessary because conventional monetary policies, which focus on influencing short-term interest rates, have proven insufficient to overcome the effects of the financial crisis on credit conditions and the broader economy. To further ease financial conditions, beyond what can be attained by reducing short-term interest rates, the Federal Reserve has taken additional steps to improve the functioning of credit markets and to increase the supply of credit to households and businesses--a policy strategy that I have called "credit easing"

He also addressed a fear that "easy" money will lead to inflation.

"Some observers have expressed the concern that, by expanding its balance sheet, the Federal Reserve will ultimately stoke inflation. The Fed's lending activities have indeed resulted in a large increase in the reserves held by banks and thus in the narrowest definition of the money supply, the monetary base. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base. At this point, with global economic activity weak and commodity prices at low levels, we see little risk of unacceptably high inflation in the near term; indeed, we expect inflation to be quite low for some time. However, at some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to moderate growth in the money supply and begin to raise the federal funds rate. To reduce policy accommodation, the Fed will have to unwind some of its credit-easing programs and allow its balance sheet to shrink."

This is an excellent read. Dare I say required for any Institutions or Money&Banking class?

BTW Does anyone have video or audio of this? (Thanks anonymous!)
The video (about 24 minutes) is here.

Quote of the day

From Ronald Reagan:

"You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it."

My department chair sent me this one. Good stuff! thanks Jeff!

Greenspan: Nationalize The Banks

I am not as high on nationalization as the article appears to be. Still think we need an "exit strategy" but ....

Greenspan: Nationalize The Banks:

"Alan Greenspan has jumped on the bandwagon.

(Okay, Greenspan doesn't have the power to implement this solution, but he used to).

Importantly, Greenspan also suggested that bondholders should take a hit--which they should. In typical Greenspan fashion, he didn't say this directly. He said we need to protect 'senior' bondholders. Which means we can go ahead and hose the junior ones."

Catching up Newsletter style

Several stories I want to point out, but will do all in one post

The mention of the NY Times podcast had some of you thinking about other finance podcasts. Here are two that were sent plus NPR's

• Knowledge@Wharton has a great list of past interviews and the like and from San Diego State Dan Siever speaks on the stimulus package.
• NPR has many many feeds.

John Mason writes at SeekingAlpha about the problems in the banking sector and concludes that regulators too deserve some of the blame:

"A liquidity crisis and a solvency crisis are not the same and should not be compared with one another. A liquidity crisis the Federal Reserve System can do something about. A solvency crisis is beyond the ability of the Fed to resolve. However, the Federal Reserve and other regulatory bodies, through their responsibility for the examination and oversight of the banking system, can help to prevent a liquidity crisis by doing a deep and thorough review of the books of financial institutions and hold these financial institutions to the standards of “good” banking practice. This effort is a first line defense against a failure of banks that could lead to a contagion amongst financial institutions"

ClusterStock reports on withdrawals from the Stanford Bank which is beginning to look eerily similar to a run on the bank after reports of fraud at the Antigua based bank.

"Depositors of Stanford Bank, the offshore bank, that may possibly be a Ponzi scheme, are pouring onto the Island of Antigua to claim their cash."

Remember the recent article from Pablo Fernandez on Equity Risk Premiums in text books? He now has another that looks at not the text books but is a survey of what financeprofessors actually use (I did fill out the survey with an answer of now use 6%, down from about 8%)

"The average Market Risk Premium (MRP) used in 2008 by professors in the USA (6.5%) was higher than the one of their colleagues in Europe (5.3%), in Canada (5.4%), in the UK (5.6%) and in Australia (5.9%). The dispersion of the MRP was high. 15% of the professors decreased their MRP in 2008 (1.5% on average) and 24% increased it (2% on average). 66% of the professors used a lower MRP in 2007 than in 2000 (22% used a higher one). The average MRP used in 2007 was 1.5% lower than the one used in 2000.

Only a week before we have a Bloomberg representative coming to class to teach a class on using the Bloomberg machine (last semester everyone in my Students in Money Management class earned their Bloomberg Certification in either Equities or Fixed Income), it seems that Bloomberg and other high end data providers are feeling the bite of the recession as well.

For now at least, Sirius seems to be financed sufficiently to avoid bankruptcy. From MarketWatch:

"Shares of Sirius XM Satellite Radio doubled Tuesday morning on news that John Malone's Liberty Media has agreed to invest a total of $530 million in the the beleaguered radio company, allowing it to avoid a Chapter 11 bankruptcy filing."

At Mises.org, Frank Shostak reminds us of the problems associated with increasing the money supply too quickly:

"It is apparent that we've learned nothing from several millennia of monetary destruction. The persistent demonstration that capital, not paper, is the basis for prosperity has fallen on deaf ears. Daily, we face the sad spectacle of government officials, pundits, and even Nobel laureates telling us that printing money is the answer to an economic downturn"

And finally, the UnknownProfessor at FinancialRounds reminds me that while teaching at a small school has many benefits, pay is definitely not one of them. He lists the AACSB report of business school professor's pay. (FTR here even finance professors are under the average for the lowest of any filed at other accredited schools. )

Lessons From Japan in Stemming a Crisis - NYTimes.com

Lessons From Japan in Stemming a Crisis - NYTimes.com:

A reminder from Japan: Don't coddle the banks, act swiftly, and force the banks to write off bad debts.

"I thought America had studied Japan’s failures,” said Hirofumi Gomi, a top official at Japan’s Financial Services Agency during the crisis. “Why is it making the same mistakes?”"

and later

"... Japan’s financial system did not start to recover until late 2002, six years after the crisis broke. That year, the government ...ordered a tough audit of the country’s top banks.

Called the Takenaka Plan...initally, banks lashed out at Mr. Takenaka....

But Mr. Takenaka stood firm. His rallying cry, he said in an interview on Wednesday, was, “Don’t cover up. Don’t distort principles. Follow the rules.”"

Legacy of a Crisis - A Generation Shy of Risk - NYTimes.com

Your Money - Legacy of a Crisis - A Generation Shy of Risk - NYTimes.com:

"You did what you were supposed to do. College. Graduate school, maybe. Bought a home. Invested in mutual funds.

And now? You have student loan debt. Your degree has not shielded you from unemployment (or the fear of it). The house is worth 20 percent less than two years ago, and your retirement portfolio is down 40 percent from its peak."

As a result, will investors invest less in the stock market? Buy fewer (and smaller?) homes? Demand a larger risk premium? Take on less debt? Save more (and thus spend less)?

The answer to all of these seems to be yes. What that means over a longer term horizon is much less clear.

The NY Times's Ron Leiber gives us a look at changing risk aversion levels with a very well timed disclaimer:

"I’m not sure we can say for sure whether there has been some permanent change in attitudes toward risk. It’s easy to overestimate the extent to which the world — and our perception of it — has changed in the middle of a crisis. But this one has not lasted long. And its duration does not come close to matching the period in the 1930s that left a permanent imprint on so many people’s financial habits."

One other look-in on the risk of turning away from equities:

" The problem with their approach, according to Mr. Brosious, is that by investing conservatively they are probably guaranteeing themselves a smaller return and a more meager standard of living in retirement.

Oh course this can be changed by saving more, but that means spending less, which means slower recovery.


BTW sort of thrown into the article is a nice (short) recap of the book “Are You a Stock or a Bond?,”

“The idea is that we should focus on our human capital and invest in places where our human capital is not,” [the book's author] Mr. Milevsky said. “It’s not about risk tolerance or time horizon but about what you do for a living.”As a tenured professor, he invests entirely in equities. Other people with bondlike characteristics who are far from retirement could take similar risks, and withstand 2008-level losses, because their incomes are fairly stable. Those who have more stocklike careers, however, probably ought to invest a bit more conservatively, in both their retirement accounts and in their primary residences.

BTW #2: this article is also discussed as part of the NY Times Podcast (12 minutes) that also talks about what the stimulus plan may mean for individuals. However I can not link to it. It is on the left side of the article.

Quote of the day

On Presidents' Day I chose one who served as president shorter than any other. William Henry Harrison.


From Infoplease:

"The prudent capitalist will never adventure his capital . . . if there exists a state of uncertainty as to whether the Government will repeal tomorrow what it has enacted today."

I did not know he ran on a platform that included the re-establishment of a national bank!

The Case for Nationalizing the Entire Economy - TIME

As a Western New Yorker (where it is both hilly and winter about 10 months a year), I know all about slippery slopes. That is what always comes to mind when nationalization of banks is discussed. The following is from Time. I do not know where the author (Doug McIntyre is from), but it must be both mountainous and cold). That said, he absolutely nails the big problem with nationalization.

The Case for Nationalizing the Entire Economy - TIME:

"Bank ownership becomes more complex when a firm owned by the government does something materially different from what its competitors in the private sector do.... The relationship between a national U.S. bank and private banks both inside and outside the U.S. causes a series of inequities within the system. A government-controlled bank might offer mortgages at extremely low rates, rates so low that they clearly do not take into account the level of home loan defaults. From a policy standpoint, it may make "sense" to do that to help buttress the housing market. But, to some extent that moves the government's control of the credit system from nationalizing banking to nationalizing the home lending system. The government could decide to apply the same principles to consumer credit loans and business lending.

It may just be a better idea to nationalize the entire economy and be done with it."

These behavioral differences (and even worse incentives than the executives had) is why question #4 scared me so much last week.

Crude oil is getting cheaper — so why isn't gas?

Basis risk is something that many do not understand at first. That should change with this example!

From Yahoo: Crude oil is getting cheaper — so why isn't gas?: "

"Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. A severe economic downturn has left U.S. storage facilities brimming with it, sending prices for the premium crude to five-year lows.

But it is the overseas crude that goes into most of the gas made in the United States. So prices at the pump will probably keep going up no matter what happens to the benchmark price of crude oil."

Suppose you were hedging gas prices using West Texas Crude futures. The fact that the two prices do not move in unison is what we call basis risk.

How current PE ratios stand up historically - MarketWatch

From MarketWatch:
How current PE ratios stand up historically - MarketWatch:

"Here's today's investment pop quiz: Where do price/earnings ratios stand today relative to several months ago, as well as to the beginning of this bear market in October 2007?.....

Based on earnings on an "as-reported" over the trailing 12-months, the p/e ratio for the S&P 500 index stood at around 20 at the stock market's top in October 2007....the comparable p/e ratio as of Thursday night, based on data from Standard & Poor's, is 29.1.

How can this be, you might ask? The answer is simple: Earnings in this bear market have fallen even faster than has the market itself. And no matter how fast the "p" in the ratio is falling, the ratio has to climb if the "e" is falling even faster.

Indeed, today's p/e ratio is higher than 97.8% of the monthly readings dating back to 1871, according to data compiled by Yale University Finance Professor Robert Shiller."

Which deserves a wow!