Entries Tagged 'Economics and Investing' ↓

Are You Being Phished?

Economists seem to think you are…

You may recall awhile ago I reviewed Fatal Equilibrium, a mystery book written by two economists back in 1985.

One of its most memorable characters was a woman professor from the Soviet Union, named Sofie Ustinov. Sofie, along with Henry Spearman, the detective in the book, was a member of the tenure committee at Harvard University:

Sofie Ustinov, the chemistry professor from the Soviet Union, doesn’t like the candidate’s paper about finding an “optimal number of brands.” Although she buys the “most expensive caviar-type” dog food for her pet, she believes that only one brand for all other commodities is quite sufficient.

This week, Robert Shiller, in The Nobel Prize winning economist who ate cat foodput paid to Sofie’s belief. Shiller’s cat too preferred caviar-type pet food. Upon tasting the ordinary fare in the expensive can, Shiller, understandably, felt “he had been ‘phished for a phool” – i.e., “manipulated into buying something.” Continue reading →

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Word of The Day – Risk Parity Funds

Risk parity funds

Definition: low-cost funds that seek to provide investors with equity-level returns and bond-like stability.


The idea of risk-parity is based on an ages-old distinction between stocks and bonds.

Bonds are said to safer because when a company goes bankrupt, stock holders get zapped first. Bondholders get zapped second. Stocks are said to be riskier than bonds; therefore they should pay higher returns than bonds.

Why are risk parity funds a bad idea? In 2007 quants, finance whizzes who use computers to tell them what to buy and sell, invented Residential Mortgage Backed Securities (RMBS) that made the very same promise. And we all remember what happened in 2007!

The mortgage market meltdown was just the first indication of troubles on Wall Street in 2007.

Today the prices of mortgage derivatives similar to RMBSs are now the determinants of housing prices. The price of a house isn’t set by supply and demand anymore. It is set by the expected amount of capital gains over the lifetime of the buyer’s mortgage. The amounts of those expectations are set by the creators of mortgage derivatives.

In other words, speculators in housing markets are still free to create bubbles that burst. Continue reading →

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Goldman’s Greek and Malaysian Deals

If you haven’t read Robert Reich’s explanation in the July issue of The Nation of how Goldman Sachs engineered Greece’s downfall you really ought to take a look. And please note this isn’t the only country in the world in which Goldman Sachs has become a persona non grata.

Reich’s allegations regarding Greece

Goldman Sachs came to the rescue, arranging a secret loan of 2.8 billion euros for Greece, disguised as an off-the-books “cross-currency swap”—a complicated transaction in which Greece’s foreign-currency debt was converted into a domestic-currency obligation using a fictitious market exchange rate.

As a result, about 2 percent of Greece’s debt magically disappeared from its national accounts.

The consequences were severe:

By 2005, Greece owed almost double what it had put into the deal, pushing its off-the-books debt from 2.8 billion euros to 5.1 billion.

Continue reading →

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