I gave a guest lecture in Intermediate Macro last year. Normally, I try not to do such things, but I was staring at some data and the offer came at the same time the data started making sense, so I said yes.
I gave them a presentation on the similarities and differences between Economics and Finance. How Economics is the Best of All Possible Worlds while Finance never is; how tax and regulatory arbitrage drives structures and products; how transaction costs are never minor; how intermediation drives investment in specific areas of finance in ways that don’t really get dealt with in Economics.*
One of the things we know in Economics is that there are not $20 bills on the street. (Ted Gayer of the Brookings Institute made this argument twice recently. If this were true, “first mover advantage” would also have to be nonexistent.)
Investment managers talk about finding $20 on the street all of the time. Most of the time, they can prove this.
Sometimes, they can’t. If you invest in a retirement fund of any sort, this is the one post you should read for the new year. Especially for this:
However there is a way of proving that a fund is not a Ponzi – and that is to “show us the money”. If the assets are really there then it should be possible to convince regulators of that fact by showing them the assets. If Bernie Madoff had been asked to prove the existence of all the money he supposedly managed then he would have been caught because he could not comply. An honest fund should be able to comply fairly quickly – sometimes within 20 minutes – but almost certainly within a week.
I have heard lots of criticism of the Australian Securities regulator. However on this important matter their actions were exemplary. They did what the SEC could not do and act on a “Markopolos letter” within weeks. They did what the SEC should have done when they investigated Madoff – and attempted to confirm the existence and value of the assets.
Three weeks later ASIC put a stop on all Astarra funds – prohibiting new money going in or any moneys going out. They acted to protect investors. This showed responsiveness that Mary Schapiro and American regulators can only aspire too.
This is one of the reasons we pay transaction costs. That “SEC fee” when you sell shares of a stock are intended to ensure that the market remains “rational.” Which is why the greatest evil of economic modeling, imnvho, is that it often treats the very things that might make its premises viable as irrelevant to its model.
UPDATE: According to Blogger, this is the 5,000th Published Post at AB.
*If you’re really curious—and probably no one is—the presentation is here.