By James Kwak
Is it the money?
Federal Reserve Chair Ben Bernanke, the man who saved the global economy, is becoming an adviser for Citadel, a hedge fund management company. Bernanke will provide advice to Citadel’s fund managers and will also meet with its clients (that is, the limited partners who invest in those funds).
It’s easy to see why Citadel wants Bernanke. He’s a smart man. He knows the inner workings of the world’s central banks as well as anyone. Although he won’t be a registered lobbyist, he can pick up the phone and get anyone in the world to answer, if he wants to. And, perhaps most importantly for the bottom line, the wow factor of having Bernanke meet with investors will help immeasurably with sales — bringing investments in the door.
The bigger question, as always, is why Bernanke wants Citadel.
By Simon Johnson
The political debate about finance in the US is often cast as markets versus regulation, as if “more regulation” means the efficiency of private sector decisions will necessarily be impeded or distorted. But this is the wrong way to think about the real policy choices that – like it or not – are now being made. The question is actually what kind of markets do you want: fair and well-functioning, with widely shared benefits; or deceptive, dangerous, and favoring just a relatively few powerful people?
In a speech on Wednesday, Senator Elizabeth Warren (D., MA) laid out a vision for better financial markets. This is not a left-wing or pro-big government agenda. Senator Warren’s proposals are, first and foremost, pro-market. She wants – and we should all want – financial firms and markets that work for customers, that encourage innovation, and that do not build up massive risks which can threaten the financial system and bring down the economy. Continue reading
By James Kwak
Beeping iPads! Buzzing phones! Zapping watches! Soon, apparently, we won’t be able to complete a thought without being interrupted by some “intelligent” piece of technology.
The solution, according to Steven Levy, is yet more technology:
a great artificial intelligence effort to comb through our information, assess the urgency and relevance, and use a deep knowledge of who we are and what we think is important to deliver the right notifications at the right time. . . .
the automated intake of our information will allow us to “know by wire,” as super-smart systems learn how to parcel things out in the least annoying and most useful fashion. They will curate better than any human can.
First of all, I’m skeptical. So is Levy, apparently; just a few paragraphs up, he writes, “the idea of One Feed to Rule Them All is ultimately a pipe dream.” The same factors that make it impossible for one company to create a perfectly prioritized feed make it impossible for one company to create a perfectly prioritized stream of notifications.
By James Kwak
Dan Davies put together a brilliant roundup of the clever business models that financial technology startups are pitching to their investors — and why most of them are deeply flawed. Some of them apply much more broadly than to just the financial services industry. Number three, for example — “Hoping that a load of people who actively mistrust each other will trust you instead” — is a decent description of the business-to-business marketplaces that Ariba was trying to build when I worked there back at the beginning of the millennium.
I’d like to add two more general principles that apply to technology companies that are trying to serve the financial services industry — mainly learned during my years working at an insurance software company before going to law school.
(I’m going to try switching to a Brad DeLong-style approach in which I put the beginnings of my Medium posts here, and then you can decide if you want to read more or not. I can’t put the whole post here because they have thirty-day exclusivity.)
By James Kwak
Did you know that blogging is dead? That’s what I hear, anyway. I plan to say something about it once I figure out if I have anything to say on it.
Anyway, as you have probably noticed, I do most of my sporadic writing over at Medium these days. Since I last checked in here, I wrote stories about:
- Why I crippled my smartphone;
- The misleading campaign against the estate tax; and
- The fallacy on the first page of Gregory Mankiw’s textbook
I also posted an essay by Walt Glazer about inequality.
By James Kwak
Supposedly President Obama is making “middle-class economics” one of the key themes of his final two years in office. I don’t really know what this is supposed to mean in a country where people making ten times the median household income call themselves “middle class” and there are tens of millions of people in poverty.
For starters, I think it’s important to understand the distribution of wealth in the country as it stands today. That’s the theme of a story I wrote on Medium earlier this week, “The Magnitude of Inequality,” which uses charts and pictures to try to convey just how unequal a society we live in.
Yesterday I published another story on Medium about one of Obama’s “middle-class economics” proposals: the forthcoming Department of Labor rule that will try to protect people’s retirement savings from financial advisers’ conflicts of interest. It’s a complicated topic to understand, and the administration proposal will undoubtedly help—but not very much, given the scope of the retirement security problem.
By Simon Johnson
In the early and mid-2000s, Citigroup had compensation practices that can fairly be described as a disaster for shareholders (and for the broader economy). Top executives, such as then-CEO Chuck Prince, received big bonuses and generous stock options. Lower level managers and traders were paid along similar lines. These incentives encouraged Citi employees to take risks and boost profits. Unfortunately for shareholders, the profits proved largely illusory – when the dangers around housing and derivatives materialized fully, the consequences almost destroyed the firm.
The market value of Citigroup’s stock dropped from $277 billion in late 2006 to under $6 billion in early 2009. The shareholders could easily have been wiped out – they were saved from oblivion by a generous series of bailouts provided by the federal government (see Figure 7 in the final report of the Congressional Oversight Panel; direct TARP assistance was $50 billion but “total federal exposure” was close to $500 billion). In the next credit cycle, the experience for Citi shareholders could be even worse. So it is entirely reasonable for shareholders to look carefully at, among other things, the details of how executives and other key employees are paid – and to understand the current incentives for taking and managing risk.
But Citigroup is resisting efforts to disclose fully the structure of relevant compensation contracts. What is Citigroup hiding now? Continue reading