Weil on Finance: Bubbles, Beanie Babies and Brains
Good morning, dear readers. Here is a look at some of my breakfast reading today.
Early signs point to Yellen getting the nod
Richard McGregor of the Financial Times writes that the White House has begun contacting aides to Democratic senators about the nomination process for the next Federal Reserve chief, suggesting that President Obama is close to a decision: “An adviser to one senator said Ms. Yellen’s name had been mentioned in one of the calls. Another adviser to a different senator said the White House had given no firm indication of its timetable for announcing a nominee.” Yellen has frontrunner status, but there will be no announcement this week.
The Fed’s morphine drip will now be even harder to quit
The Wall Street Journal’s Justin Lahart had a smart take after the Federal Open Market Committee’s decision not to cut back just yet on monthly bond purchases: “What Fed officials may not have recognized was how intertwined its bond-purchase program and its commitment not to raise short-term rates were in investors' minds. Investors saw scaling back bond purchases as a prelude to raising short-term rates. The Fed was unable to shake them of that belief. Wednesday, it threw in the towel. In doing so, however, it only cemented the perception that the Fed's bond purchases and its short-term rate commitment are closely allied. Ending the bond-buying program will be even harder now.”
Finally a settlement in the London Whale scandal
It seems today is the day we will get to read the settlement papers between JPMorgan Chase & Co. and some of its regulators, including the Securities and Exchange Commission, over the London Whale trading scandal. The details have been leaking all week. Now the settlement amount is up to $900 million, according to this article by Dawn Kopecki of Bloomberg News. There still could be more fallout to come. Other government agencies aren’t done with their whale probes.
The human brain and financial bubbles
Here’s a new scientific paper from the journal Neuron, called “In the Mind of the Market: Theory of Mind Biases Value Computation during Financial Bubbles.” And here’s the quick summary written for laypeople: “Researchers from the University of Utah and the California Institute of Technology looked at brain activity of volunteers as they traded shares within a staged financial market. They found that the formation of bubbles was linked to increased activity in an area of the brain that processes value judgment. People who had greater brain activity in this area were more likely to ride the bubble and lose money by paying more for an asset than its fundamental worth.” You know what would be fun? Let’s get the scientists together with the members of the Federal Open Market Committee and see if the quantitative easers have greater activity in this same area of the brain. It could explain a lot, don’t you think?
And speaking of bubbles . . .
Remember the bubble in Beanie Babies during the late 1990s? Ty Warner, the billionaire founder of Ty Inc., has agreed to plead guilty to tax evasion over a secret offshore bank account he had with UBS. Life isn’t fair. UBS got a deferred-prosecution agreement with the Justice Department, but he didn’t.
(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)
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