Steven N. Kaplan

Jobs, Not the 1%, Are What Make Americans Fret

about 2 years ago

The themes of inequality and the 1 percent dominate the news. Critics deplore that the share of pretax income accruing to those at the top has increased markedly over the past 30 years and is now greater than it has been since the 1920s.

It is suggested, too, that growth in income inequality has been a significant contributor to the current financial crisis and the slow recovery. President Barack Obama recently took this position, arguing that this is dragging down the economy. The Occupy Wall Street movement has been motivated by outrage over the gains of the top 1 percent and the nefarious consequences of this imbalance.

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the Squam Lake Group

SEC Beware, Money Funds Can Bring System Down

about 2 years ago

News reports suggest that the Securities and Exchange Commission may be backing away from a reform of money-market funds. This would be a mistake.

The debate over how to overhaul prime money-market funds has focused on preserving the commercial viability of these instruments while significantly lowering the threat they pose to financial stability. The latter objective should have priority.

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Thomas Cooley & Kim Schoenholtz

How Shape-Shifting Banks Foil Dodd-Frank Act

about 2 years ago

Deutsche Bank AG (DBK) recently separated its U.S. investment bank from its bank holding company, removing it from supervision by the Federal Reserve.

So far, U.S. regulators have reacted passively to such moves by foreign banks to avoid the heightened capital requirements mandated by the Dodd-Frank Act.

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Kellie A. McElhaney

How Good Business Can Lift Apple’s Share Price

about 2 years ago

Early this month, Adrian Kingsley- Hughes made this prediction on Forbes.com: “It seems quite possible for Apple stock to hit four digits in the next couple of years, barring any missteps.”

The author probably imagines future missteps such as overheating iPads, a possible unsuccessful foray into the television-set market, or the failure of the company’s new chief executive officer, Tim Cook, to live up to the legacy of Steve Jobs.

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Douglas J. Skinner

Why U.S. Companies Continue to Pay Dividends

over 2 years ago

Much has been made of Apple Inc. (AAPL)’s recent decision to begin paying regular dividends, given the company’s large free cash flow (about $1 billion a week) and cash balance (close to $100 billion).

Yet, according to finance theory, stock-market investors should be indifferent to whether they receive their returns as cash dividends or capital gains. In fact, when dividends are tax disadvantaged, as was the case until 2003 and may be so again soon, investors should prefer retention and the resulting capital gains. This led economists -- notably Fischer Black in 1976 -- to describe the payment of dividends as a puzzle.

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Luigi Zingales

End Double Mandate to Save Fed’s Independence

over 2 years ago

There’s one prediction that can safely be made about the decision that the Supreme Court will render on the Affordable Care Act: The final vote will almost certainly be along party lines.

The court’s progressive politicization in recent years is a natural reaction to the increasingly activist role it has adopted. As justices have weighed in on questions that were traditionally the province of elected officials -- such as abortion rights -- political institutions have fought back by making ideological orthodoxy a requirement for a Supreme Court appointment.

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The long gestation of the Consumer Financial Protection Bureau, which was mandated by the Dodd- Frank Act, is over.

Now that the bureau’s chairman, Richard Cordray, is in place and it is rolling out programs, it is a good time to think about how government intervention can improve outcomes in the financial products consumers buy. Regardless of whether one prefers caveat emptor, a paternalistic federal government or something in between, the CFPB is a reality. Improving financial decisions by consumers is a worthy goal, but it will not be easy to design effective government actions to help them do so.

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John H. Cochrane

Austerity or Stimulus? What We Need Is Growth

over 2 years ago
Austerity

Austerity isn’t working in Europe.

Greece is collapsing, Italy and Spain’s output is declining, and even Germany and the U.K. are slowing down. In addition to their direct economic costs, these “austerity” measures aren’t even swiftly closing budget gaps. As incomes decline, tax revenue drops, and it becomes harder to cut spending. A downward spiral looms.

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Anil K Kashyap, Kim Schoenholtz & Hyun Song Shin

Will EU Fail Stress Tests?: Kashyap, Schoenholtz, Shin

over 2 years ago

(Corrects probable timing of EBA’s Europe-wide stress tests in second, fourth and final paragraphs.)

The Federal Reserve’s 2012 stress tests of U.S. banks suffered from some of the same weaknesses as the ones it conducted last year.

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It has been another disappointing year for investors in actively managed funds.

In 2011, about 79 percent of large-cap mutual fund managers trailed the Standard & Poor’s 500 Index (SPX), according to Morningstar Inc. The average equity mutual fund lost almost 3 percent last year, compared with a 2 percent gain for the S&P 500, says Lipper U.S. Fund Flows. Hedge funds fared even worse, with an average loss of 5 percent, according to Hedge Fund Research Inc.

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Debt-Ridden Housing

There is an emerging consensus that housing is weighing down the U.S. economy. The Federal Reserve’s housing white paper in January declared that “ongoing problems in the U.S. market continue to impede the economic recovery.” The 2012 Economic Report of the President argued that “declines in housing wealth can have a far greater effect on the economy than equivalent losses in other financial assets.”

Are these arguments sensible? Why should declines in house prices affect the broader economy? And why should the drop in housing wealth matter more than, say, a drop in stock-market wealth?

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The currency of social media is influence. Credit-card companies offer rewards to customers with a high influence score, airlines give such people free flights, and some employers make job offers dependent on those ratings.

So how do they find opinion leaders? How do they determine a person’s influence? Where do these scores come from?

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Alexander David & Pietro Veronesi

Why U.S. Treasuries Won’t Always Be a Haven: David and Veronesi

over 2 years ago

At the onset of the financial crisis in 2008, the volatility of stock returns increased dramatically as the equity markets plunged. At the same time, U.S. Treasury bond prices shot up. The correlation of bonds and stock prices has been mainly negative ever since.

This makes sense: In times of trouble, we dump stocks and buy safe Treasury bonds, and their prices should move inversely. This also would mean that in better times, we buy stocks and sell bonds, implying that the correlation between Treasuries and stocks should always be negative.

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Europe’s Response to Debt Crisis

In many ways, things in Europe look better than they did just a month or two ago. The European Central Bank is providing banks with almost unlimited cash to buy their governments’ bonds. Yields on Italian debt have declined.

This breather is a perfect opportunity to examine some pernicious -- and widely circulated -- myths that have emerged from the crisis and could still do much harm.

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What problems can the U.S. solve with renewable energy?

Four years ago, both presidential candidates acknowledged the threat of climate change and endorsed vigorous policies to move away from fossil fuels. The U.S. seemed on the verge of committing to greenhouse-gas reductions and developing alternative-energy technologies. Since then, most Republican leaders have become skeptical about global warming and now oppose any major policy response.

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Most policy ideas for reducing demand for energy rely on one of two claims about why consumers need to be steered toward using less of it. Call these claims Flawed People and Flawed Markets.

Flawed People consume too much energy if they do a poor job of considering energy prices in their decisions, and thus make bad choices about which cars and other energy-intensive products will suit their tastes in the most cost-effective way. Flawed Markets lead to too much energy use if people do a great job of considering energy prices in their decisions, but those market prices are too low to reflect the real costs to society. In this case, people who make cost-effective choices for themselves create negative spillovers for everyone else.

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Michael Gibbs, Kathryn Ierulli & Valerie Smeets

For Companies, Joining Up Is Hard to Do: Gibbs, Ierulli, Smeets

over 2 years ago
Mergers

Mergers are famously disruptive for companies and employees. They also don’t always make business sense: About half of all combinations are considered financially unsuccessful, according to a 2003 study by the Federal Trade Commission.

So what makes for a successful merger? Experience shows that the primary reason for failure is the difficulty of organizational integration. A 2010 PricewaterhouseCoopers survey of post-merger companies finds that careful planning of integration ensures that a combination is more likely to achieve cost synergies or other goals. The report says that “speed is critical,” adding that the most important challenges “are motivation of employees, alignment of cultures, organization and processes as well as IT systems.”

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Not long ago, Washington policy makers, especially the Treasury and the Federal Reserve, were declaring the U.S. banking system safe from the throes of the subprime-mortgage crash.

One good sign: Most large banks were paying back their bailout loans from the government. The passing grades assigned to most of the same banks as part of the Federal Reserve’s stress test were another positive signal. Even those lenders receiving less than top assessments could access additional private capital to stabilize their balance sheets.

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Corporate Responsibility

Although the phrase is now somewhat out of fashion, the issue of corporate responsibility is at the heart of many of the debates on economic policies around the world. Should corporations simply maximize profits and let the invisible hand do its wonders, or do they have some obligation to be good corporate citizens as well?

As with many politicized debates, this one has been captured by two extreme positions, neither of which are, to my mind, particularly sensible.

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For many aspiring entrepreneurs, the hunt for venture capital is a tale of frustration and woe. Yet an entrepreneurial minority, sometimes viewed as the lucky few, appears to raise money with relative ease.

It turns out there is a roadmap to venture-fundraising success. My research with Stanford University’s Kathleen Eisenhardt, which will be published in the February edition of the Academy of Management Journal, identifies four hallmarks of efficient prospecting for money. By efficiency we mean attempts that take less than two months of formal, almost full-time fundraising, while yielding offers from desired investors.

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