Aphorisms about Financial Markets, 1/28
for my forthcoming seminar
The four-part seminar for paid subscribers on financial institutions begins the evening of February 14. The closest thing to a textbook for the seminar will be Calomiris and Haber, Fragile by Design. But if that book is too long and expensive, feel free to search on line for available work by the authors. For example, Chartering the Fintech Future, by Calomiris.
The question to think about for the first seminar is: why do we have financial institutions in the first place? How do individual traders make profits? How do financial businesses make profits?
Below are some aphorisms about financial markets that will be explained over the course of the seminar (not necessarily during the first meeting):
Households and nonfinancial firms want to issue risky, long-term liabilities and hold riskless, short-term assets. Banks accommodate by doing the reverse.
Economists like to model the world as having complete financial markets without any financial institutions.
Economists have difficulty explaining why so many people wager on football and why so few people try to buy financial protection from macroeconomic risk.
It is hard to explain behavior in financial markets without invoking a “taste for trading.”
If everyone only cared about two characteristics (e.g., mean and variance), then there would only be two portfolios.
Regardless of the stated intent of government intervention in financial markets, the real goal is allocating credit to favored uses, including government spending.
Governments and banks are like two drunks leaning on each other to walk home. One cannot make it without the other.
Regulated financial institutions are adjacent to government. Unregulated financial institutions are adjacent to criminal activity.
“If you don’t know who you are, this is an expensive place to find out.” The Money Game, by ‘Adam Smith’ (George J. W. Goodman), p. 41
“the next time someone says there is nothing going on in the stock market, but an interesting situation has come up in commodities, I am going off to some mouse beach and wait in the sun until it all blows over.” ibid, p. 265
will you record the discussion? Valentine's Day is a tough one to sneak off to listen to a seminar.
Should we have read all of Fragile by the 14th if we want to follow along?
"Unregulated financial institutions are adjacent to criminal activity"
Right. Any system which is resistant to state supervision and regulation is going to be most attractive to those with the greatest incentive to evade government controls, who are always typical bad guys. There are good guys who want the capability for good reasons, but there's no way to make sure only 'good' guys get it.
The state is always going to argue that the absolute worst of these cases is the reason they cannot tolerate the existence of such systems. To be fair they have a point, but it's also a matter of judgment regarding the tolerable scale of bad acts. I'm frankly a bit surprised that USG hasn't yet gotten serious in the war on end-to-end encryption, having only fired a few warning shots, but if it doesn't have some kind of giant and secret Ace in the hole, then it's probably just a matter of time until it does.