Readings: Greed & Guile, Cost of Capitalism, Default Rates
- Harvard Business:Do Economists Breed Greed and Guile?
… most economists at top business schools are clueless about the nitty-gritty of management, which can’t be captured in elegant mathematical models. They treat any teaching remotely related to what leaders actually do on their jobs as a low status activity; at faculty meetings, I’ve seen economists and their followers dismiss and ridicule professors who teach “soft” skills. Those who speak in simple language and use words instead of numbers are often screened out, expelled or sentenced to spend their days at the bottom of the pecking order.
If MBAs are already attracted to business schools for the money, and are reinforced in the belief that that self-interest and greed (perhaps along with lying and backstabbing) are natural and inevitable, then no wonder we’re in trouble.
- Economist: Minsky’s moment
The cost of capitalism, to use the title of a new book* that draws heavily on Minsky’s work, is first, that financial bubbles are created and second, that governments are forced to rescue the sector when those bubbles pop. Those who believe blindly in free markets are thus mistaken, in the view of Bob Barbera, a Wall Street economist and the book’s author.
… central banks should build the level of corporate-bond spreads into their models. When spreads are low, risk appetites are high, as they were in 2005-06. That should lead central banks to tighten monetary policy. When spreads are high, they should ease.
About 53 percent of U.S. companies that issued high-risk, high-yield bonds will default over the next five years, according to Jim Reid at Deutsche Bank AG.
The figure compares with a 31 percent five-year rate in the early 1990s and 2000s, and as much as 45 percent “in a very, very different market in the Great Depression,” Reid, the London-based head of fundamental credit strategy, wrote in a note to clients today. The estimate is based on the premium investors demand to hold the notes and assumes recoveries from the defaults will be zero, Reid wrote.
Guesstimate, but scary nevertheless.
