The financial alchemy that failed

With his conception of successive ‘Ages of Capitalism’, Anatole Kaletsky provides a canvas broad enough to encompass the banking crisis of 2008 and much more. After briefly outlining the Four Ages he identifies, we focus on the period of the Great Moderation when Inflation Targeting seemed to have solved the problem macroeconomic management – until it ended in spectacular failure. The rapid growth of cross-border banking – with securitized assets funded by wholesale money – evidently posed threats to financial stability that had been ignored by a regime targeting consumer prices. We look at three: the pecuniary externalities exerted by asset price changes on investment banking; information failures leading to an exaggerated banking boom; and the risk of insolvency in the subsequent ‘bank run’. The financial system pre-crash was, it seems, flawed by two Fallacies of Composition: by regulation that reckoned making individual banks safe guaranteed systemic stability; and a business model that reckoned securitization ensured liquidity whenever necessary. Finally, we discuss how, in different countries, the law has variously been invoked to handle reckless banking

Revisiting the forward-spot relation: An application of the nonparametric long-run correlation coefficient

This study revisits the statistical relationship between the spot and the forward rate. Unlike previous studies, this association is measured by the estimation of the long-run correlation coefficient, a non-parametric measure of linear association. This estimator was shown to be equivalent to the Bartlett kernel spectral estimator of the complex coherency at frequency zero. This statistic allows for the measurement of the intensity of correlation. Using data for the £/DM over the May 1992 British General Election and September 1992 ERM devaluation, and for the FF/DM, BEF/DM, AT/DM, and NLG/DM up to the introduction of Euro, the results show that the predictive ability of the forward rate increased. © 2010 Springer Science+Business Media, LLC