Thursday, August 27, 2009

Too Many Graduates Employed in Private Financial Firms?

In his Financial Times column of August 27, 2009, Harvard economics professor Benjamin Friedman opines that too much of the nation’s talent in recent years went into private financial firms manipulating small margins in millisecond trading, instead of enterprises producing non-financial goods and services. While it was rational for each individual to pursue his own economic self-interest maximizing income, it fostered waste at the aggregate national level.

For a moment I thought Professor Friedman was writing about his colleagues in economics departments and business schools. The enormous growth in recent years of these two fields did little to prevent, perhaps even contributed to, the economic meltdown of 2008-09, having taught a generation of students that mastering mathematics and high-powered statistics will enable them to succeed in their individual careers and ability to manage the economy to prevent the eruption of catastrophic financial crises.

Yet, new buildings housing economics and business education are mushrooming at universities across the country, indeed around the globe. Perhaps what’s needed is a reallocation of financial and human capital teaching students how to make things and provide services?

Tuesday, August 25, 2009

Rule Bernanke, Bernanke Rules the Fed

With President Obama’s announcement on August 25, 2009, that he would nominate Fed chairman Ben Bernanke for another four-year term, two big issues will dominate macroeconomic discussion in the next few years.

The first is the so-called "exit strategy." To minimize the risk of inflation, when will the Fed begin to raise interest rates and withdraw much of the liquidity it pumped into the financial markets? Some distinguished economists and financiers warn that tightening monetary policy too soon risks another downturn; others warn that waiting too long risks inflation. We’ll find out if the Fed’s timing was right only after the fact. There is no way to run an experiment simultaneously testing the rival views.

The second issue is curtailing "staggering budget deficits" and the accumulation of a massive national debt. (Where is Jim Sasser when we need him?) The goal is to persuade political decision makers to reduce deficits by some combination of spending cuts and tax increases, two hot potatoes in Congress land. Good luck. Lecturing Members of Congress of both parties to control spending is akin to lecturing rats on the benefits of proper hygiene to control plague (acknowledgment to Brock Yates for the adaptation of his poignant phrase).

Monday, August 24, 2009

Taxpayers are Rolling in Green(backs)

It was reported on August 24, 2009, that U.S. taxpayers have thus far made a profit of $11 billion on their investment in Citigroup. So, when can we (the taxpayers) expect to receive a dividend? Or, is it more likely that the government will use the profit from the sale of its stake, when it chooses to sell, for other spending programs?

The notion that taxpayers profit from government loans and investments does a disservice to the English language.

Monday, August 17, 2009

What About Topeka?

The Kansas City Federal Reserve Board is hosting the 33rd annual Jackson Hole Economic Symposium during August 19-21. The program, as usual, will consist of morning panels and discussions, with afternoons off for recreational activities.

I’ve been to Jackson Hole several times, most recently speaking at a meeting of the Western Governors Association. The Grand Tetons are spectacular. Mid-August is perfect resort weather. Jackson Hole is a charming western town with splendid restaurants.

But why are all these distinguished central bankers, economists, financiers, and journalists meeting in Jackson Hole? Shouldn’t they be setting an example for the rest of us by meeting in a budget-priced location, such as Topeka, Kansas, in which there would be few distractions from analyzing why the world was on the verge of a global financial meltdown last fall, and how to take preventive action the next time a bubble is forming. Meeting in Topeka, or Wichita, or a host of other such modest communities, would show real seriousness as well as give a fillip to the local population.

Sunday, August 16, 2009

Constructing Finance and Economics Centers to Prevent Another Meltdown

What did you do this summer? Did you have a nice vacation? Travel? Go to the beach? Catch up on your reading?

I am having a wonderful summer browsing the financial and economics blogosphere. Eminent left, right, and center professors of finance and economics at Harvard, Yale, Princeton, Chicago, Berkeley, Stanford, and other leading universities are engaged in all-out civil war. They mince no words, charging each other with ignorance and illiteracy on the effects of the stimulus, monetary policy, financial innovation, too little or too much government regulation, and so on. In a mid-June visit to officially open the $115 million new academic building of the London School of Economics, Queen Elizabeth II asked the director of research at the school’s management department how professors of economics and finance failed to anticipate the credit crunch that harmed so many of her subjects.

A wide variety of explanations can be found in the blogosphere and in numerous books and articles written by financial journalists, economists, and historians. To this point, no one has yet spelled out a convincing remedy that would preclude future financial crises. In this vein, let me propose a solution.

Stanford University is constructing what will likely be the most modern graduate school of business facility in the world. The Knight Management Center, as it is known, consists of eight elegant buildings totaling 360,000 square feet. Three have already been framed. You can follow its progress and view drawings of the full complex at http://www.gsb.stanford.edu/knightcenter/

The medium can be the message. I suggest that construction of the last three buildings be delayed to enable the architects to craft new blueprints. One building could be in the shape of a big balloon to house the Center for the Study of Bubbles. A second could be a linear one-story building that symbolizes the timeline of history; it would house the Center for the Study of Economic History. A third could resemble Archimedes using a lever to move the world to house the Center for the Study of Leverage and Risk. Students would spend a quarter or semester in each of the three buildings.

Architecture can reflect the values and ideals of contemporary civilization. It can also serve to inform.

Just a thought.