Category Archives: comment competition


By James Kwak

One of the criticism’s of Michael Lewis’s book is that he gets his moral wrong. High-frequency trading doesn’t hurt the little guy, as Lewis claims; instead, it hurts the big guy. The explanation is this: people sitting at their desks buying 100 shares of Apple are getting the current ask, so mainly they care about volume and tight bid-ask spreads. Institutional investors, buy contrast, want to buy and sell huge blocks of shares, and they don’t want the price to move in the process; they are the ones being front-run by the HFTs. Felix Salmon pointed this out, and it’s the subject of an op-ed by Philip Delves Broughton today.

What this leaves out is the question of who ends up being harmed. To figure that out, you have to ask whose money we’re talking about when we say “institutional investor.” If it’s SAC Capital, meaning Steven Cohen’s money, then who cares? But most ordinary people invest—if they are lucky enough to have money to invest—through mutual funds (401(k) plans, for example, are largely invested in mutual funds), and those funds are among the “institutional investors” losing money to HFTs. Another big chunk of institutional money belongs to pension funds. In this case, if the pension fund does poorly, the money may come out of its corporate sponsor in the form of increased contributions—or it may come out of beneficiaries and taxpayers in the form of a bankrupt plan shifting its obligations to the PBGC. Then there are insurance companies: in that case, losses from trading affect shareholders, but if they are systemic across the industry they end up as higher premiums for consumers.

This is not to say that the institutional investors are warm and cuddly and are just passive victims in all of this. I’ve spilled enough ink inveighing against active asset managers, and Salmon points out that the buy side bears its share of blame for being careless with other people’s money. At the end of the day, if HFT harms other people in the markets, it’s just a fraternal spat among capital, and doesn’t affect the fundamental divide in the post-Piketty world. Until a poorly-tested algorithm goes berserk and freezes the financial system, that is.

Has Anyone Taken Responsibility For Anything? (Weekend Comment Competition)

With the anniversary of the Lehman-AIG-rest of the world debacle fast approaching, it seems fair to ask: Who accepts any blame for creating our excessively crisis-prone system?

Friends and contacts who work in the financial sector freely discuss their participation in activities they now regret.  But where is the mea culpa, of any kind, from a public figure – our “leadership”?

I suggest we divide the competition into three classes.

  1. Policymakers who now admit that any of their actions or inactions contributed to the Great Credit Bubble.  Blaming China gets a person negative points; this may hurt Fed officials.
  2. Private sector executives who concede they made mistakes or misjudged the situation so as to lose a lot of Other People’s Money.  Blaming Hank Paulson also earns negative points (too obvious). Continue reading

Who Is Too Big To Fail? (Weekend Comment Competition)

In 2004, Brookings  published “Too Big To Fail: The Hazards of Bank Bailouts” by Gary Stern and Ron Feldman (paperback edition 2009).  There is a great deal of sensible thinking in this book, as well as much that now seems prescient – particularly as they have been presenting and publicly debating these ideas at least since 2000.

Some of it also seems a bit dated, but in an interesting way that tells us a great deal about how far we have come.

On the basis of their qualitative assessment, reading of the regulatory tea leaves, and a deep understanding of the available data, Stern and Feldman construct several lists of banks that may be considered (in 2004) Too Big To Fail.  The most interesting names and numbers are in Box 4-1 (scroll to p.39 in this Google Books link) (update: or look at this pdf version), entitled Organizations Potentially Considered Large Complex Banking Organizations.

Here’s this weekend’s competition. Continue reading

Design A Country Rescue Package Here (Comment Competition)

Here’s your Memorial Day assignment.  You have been called to the table for top-level policy discussions in a large monetary union.  One of the bigger countries in this union has a serious problem.  Their exports are down slightly and there are some longer-run structural issues, but the immediate issue is (1) a housing bubble just burst, resulting in a big fall in tax revenue, (2) the political system seems paralysed, i.e., cannot raise other revenues or cut spending in any sensible fashion, and (3) the market for this government’s debt appears likely to turn very sour.  Sounds like a classic fiscal crisis.

Here are your possible recommendations: Continue reading

Peer Steinbrück’s Peers (Weekend Comment Competition)

Everyone has their favorite politician.  Mine is Peer Steinbrück, Germany’s Minister of Finance.  In terms of having inappropriate – but revealing – things to say at just the wrong moment, Mr. Steinbrück is world class.

This week he blasted the US bank stress tests as worthless.  Back in October 2008 he famously denied there was any problem in the European banking system, shortly before the G7/IMF weekend that culminated in European bank rescues.  And in early 2008 he and his subordinates castigated the IMF for suggesting that Germany and the eurozone could experience even a mild slowdown – have you seen the latest data?

This comment competition is straightforward.  Find the politician (or other leading public figure in any country) with the most untimely quote of the past 18 months.  We’re looking for hubris and denial, preferably 24 hours before an abrupt policy U-turn – so please indicate the precise context that makes the quote appealing.  If your choice is Peer Steinbruck, pick his most perfect moment.

By Simon Johnson

“Nationalization” (A Weekend Comment Competition)

Writing in the Financial Times on January 27th, 2009, Peter Boone and I expressed our opposition to bank nationalization in no uncertain terms,

If you want to end up with the economy of Pakistan, the politics of Ukraine, and the inflation rate of Zimbabwe, bank nationalization is the way to go.

Most others who recently advocated a managed bankruptcy process – or FDIC-type intervention – for big banks (with or without the injection of new government capital) were careful, at least initially, to avoid using the word nationalization.  And many took pains to explain in detail why their proposals were quite different from nationalization.

But at some point this became a debate in which informed bystanders perceived the sides as being for or against “nationalization” – a semiotic transition that has obviously helped the big bankers, at least in the short term.

This weekend’s comment competition is in two parts.  Who first made “nationalization” the central word for the U.S. bank discussion?  And who was most influential in establishing that the national debate be defined in these terms?

Ponzi Schemes Of The Caribbean (A Weekend Comment Competition)

The IMF has just released a new working paper, with more detail than you likely ever wanted to know about how Ponzi schemes work – particularly in and around the Caribbean.

Ponzi schemes are everywhere and, at least in some environments, new versions arrive frequently.  But why are they so hard to prevent and shut down once they appear?  The paper contains some strong hints, albeit couched in very diplomatic language.

The comment competition is: what, if anything, does the failure of governments to shut down blatant Ponzi schemes imply about the prospects for a potential “macro-prudential” system/market-stability regulator implementing cycle-proof rules in the United States?  Is there a better way to prevent the kind of behavior that led to our current financial crisis?