Finding $20 Bills on fhe Street
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.
Please explain slide 7 where you pose the question whether G should be constant ratio, because everything other than defense and education are negativce to growth.
I have more than 37 yeara around buying things for US defense and most of it is better spent elsewhere. I am particularly comfortable, but that is the main benefit I see, and not much for the taxpayer.
I support Seymout Melman’s (Columbia University) hypothesis, being in the business, that in every way funds are better used elsewhere than to build a war machine.
Particularly in current affairs when the US war machine is largely a jobs and wealth transfer program to assure the laboring classes have no opportunity to share in the fruits of productiviity and exploitation of nature (see Orwell).
The problem comes from economists hiding their assumptions. You’ll get a paragraph at best about assuming full information in perfect competition but very little on how insane that assumption really is and how relaxing that assumption basically invalidates many of the efficiences that you are supposed to have.
Despite the SEC’s serial incompetence w Madoff, it did check the assets in one of its investigations, per SEC Inspector General Report. Madoff purported to liquidate all positions to cash at financial reporting dates, and was able to show the SEC investigators cash holdings equal or exceeding the reported cash in all registered accounts. Of course, Madoff did not volunteer the amount owed to unregistered accounts, to which the SEC was blind, This one check is not always enough. Of course, the SEC would have caught Madoff if they had followed up obtaining from the DTC trade records, which would have showed that client transaction statements were fictitious.
Someday, we will likely stop discussing whether the SEC was diligent in conducting their mission. They wern’t. In fact, they were criminally negligent, just like GW and his entire government.
It is more than likely that more than one SEC official knew that Madoff was dirty. They chose to maintain their Ivy League credentials by ignoring what was going on. Just like WS did.
Wall Street knew that Bernie was a scam. They never sent him a dime. They also never turned him in. They emulated him.
Regarding slide 35, isn’t income:debt service (= DSCR) more relevant? If in real $ I bought a $200,000 house with 30% down in 1980 and had a 30-year mortgage at 15%, on my $40,000 income, I’ve got debt:income (acknowledged that you used disposable – which itself is a small problem), of 140:40 = 3.5x, but my debt service is $21,000, so my DSCR is 1.9x.
Similar scenario in 2003, I buy a $200,000 house but only put 5% down at a 6% rate and still with $40,000 of income. Now my debt to income is 4.9x, but DSCR is 3.9x.