Wednesday, June 9, 2010

Fama on regulation and the financial markets

Gene Fama - the person credited for developing the efficient markets theory - talks about whether or not markets are still efficient and whether the efficient markets theory still works.

His main points:
1. Of course markets are still efficient.
2. Even professionals cannot time the market. (In other words - buy index funds)
3. Although he prefers less regulation, the concept of banks being too big to fail is a problem. TBTF occurs because the government cannot let a huge bank fail because of the risk to the financial system. In essence the government unwillingly gives a guarantee to the bank. His solution, which is one I have also mentioned before, is to increase capital requirements. He wants huge capital requirements - 40% or more. In this case government regulation is needed to combat this TBTF problem.

BP's stock price

Felix Salmon has a nice quick discussion of BP and its huge dividend yield.

For my MBA students - this came up in class on Monday night.

Tuesday, June 8, 2010

Who knows more about economics - the right or the left?

According to a recent survey, right wingers (libertarians and republicans) understand basic economics better than left leaning liberals. The differences were really quite dramatic.

As a bleeding heart I'd like to say that I am shocked and sure it can't be true, but truth be told, the findings are not surprising to me. The article is summarized in the Wall Street Journal here, and the full article is here.

The questions asked are as follows - you can do the test yourself...

1. Restrictions on housing development make housing less affordable.

2. Mandatory licensing of professional services increases the prices of those

3. Overall, the standard of living is higher today than it was 30 years ago.

4. Rent control leads to housing shortages.

5. A company with the largest market share is a monopoly.

6. Third-world workers working for American companies overseas are being

7. Free trade leads to unemployment.

8. Minimum wage laws raise unemployment.

The unenlightened (wrong) answers are as follows...


Scott Adams on investing.

Scott Adams (of Dilbert fame) offers some timeless advice on investing. All of it is highly humorous, and most is pretty true.

Monday, June 7, 2010

Incentives of oil companies ....

Oil companies and other firms in the US and the west like to tout their environmental record. But if they are strictly trying to maximize shareholder wealth, they should only protect the environment when it is value creating to do so. It could be value creating because of public perception, law suits, or regulation. Of course the companies will always say that they are doing the right thing because they love nature...

So one way to figure out what they really are thinking is to look at what they are doing when there is no threat of legal or regulatory action and when the local public opinion doesn't matter. Case in point: Nigeria.