Final ARTICLE ON PRIZZE

At the University of Chicago, there are two professors of economics named Eugene Fama.
The first — let’s call him Fama the Younger — started in the 1960s. He developed a profound insight about the markets. This Fama observed that over the short term, equity markets behave randomly. The day-to-day, week-to-week trading action has no rhyme or reason. Indeed, the random walk of markets makes them effectively impossible to predict in that time frame.

Why was this? Fama reasoned that the pricing mechanism of markets — what you or I would call trading — efficiently reflected all known information about stocks. Buying and selling created an “informational efficiency.” If there were any significant details known about a company, someone would discover it eventually and act on that information. Hence, all known data that exist about a company are reflected in its stock price. The Efficient Market Hypothesis, as Fama called it, meant that stock-picking was a futile exercise. He described the details in a 1965 paper titled “Random Walks in Stock Market Prices.”
The relevance to finance was soon obvious: Most investors are better off owning the entire market, rather than guessing which stocks might do better or worse. We can quibble with some of Fama’s reasoning. It turns out that prices are not all that rational and frequently deviate from known data — but Fama got the big concept right: Markets behave unpredictably in the short term.
For this, Fama is thought of as the intellectual father of indexing. The entire concept of passive investing in indexes grew around his insights. His work became hugely influential, and remains so to this day. If you own a Standard & Poor’s 500-stock index, you do so because of Fama the Younger’s observations.
Had he stopped there, Fama the Younger probably would have flown to Sweden to pick up his Nobel Prize money decades ago.
But the years went by, and Fama kept coming back to his hypothesis. He pushed it to all manner of odd places. So the Nobel committee was confronted with the problem of Fama the Elder — the second Eugene Fama. That professor built on his own work. The influence of his insight imbued the Elder with prestige far beyond what his latter flawed work should have generated. It allowed him to expand his efficient-market thesis. That, dear readers, is where our boy ran into trouble.
Fama the Elder took the idea of efficient markets to an illogical extreme. He made a leap of faith based largely on the earlier flawed analysis that led him to the correct conclusion that markets behave randomly. Because markets reflect all known information in their prices, Fama rationalized, most of the rules and regulations related to securities were unnecessary. Even worse, he reasoned, they were counterproductive because they interfered with the price discovery process.
Insider trading rules? We don’t need them! Why would we, when even nonpublic information known to insiders is reflected magically in stock prices! Indeed, we can eliminate nearly all of the rules that have been developed since the Great Depression to regulate investing and trading. After all, Fama argued, with all information reflected in the price, these rules are superfluous.

Over the next three decades, Fama the Elder exerted enormous influence. The professor shaped financial theory. He influenced generations of economics and business students nationwide. And his hypothesis swayed senators, Federal Reserve chairmen, even presidents.
This created a bit of problem for the Nobel committee working on the Sveriges Riksbank Prize in Economic Sciences. If the first Fama can rightfully be called the father of passive investments, then the second Fama is in many ways the intellectual father of the financial crisis. His thinking laid the groundwork for deregulations that had a terrible impact.

Consider the grand experiment just before the financial crisis: The Commodity Futures Modernization Act of 2000 turned derivatives into a unique category of financial instruments. They did not mandate any disclosure, they were not obligated to be traded on any exchange, and underwriters were not required to hold reserves against potential losses. The theory was that the risks would be reflected, somehow, in the price.

The repeal of Glass-Steagall was another deregulation that could be traced to Fama. Glass-Steagall acted as a firebreak between Wall Street and Main Street. When that firebreak went away, it did not cause the crisis, but it allowed its spread.
Even then-Federal Reserve Chairman Alan Greenspan fell prey to the errors of Fama’s hypothesis. Fed Gov. Ed Gramlich had brought the subprime mortgage lenders and securitizers to the Fed chief’s attention as predatory lenders with the power to destabilize the mortgage markets. Greenspan called them “financial innovators” who should not be burdened with regulation. As detailed by the Mortgage Lender Implode-o-meter, 388 of these firms went down in flames, ravaging the credit markets. Despite all of this, Fama the Elder went so far as to say, “I don’t know what a credit bubble means.”
You can see the quandary this created for the Nobel committee. On the one hand, Fama is the father of modern indexing; his influence — from the development of exchange-traded funds to retirement planning — cannot be overstated.
Fama the Younger’s work was insightful and created an immense benefit for investors. But Fama the Elder’s work was almost as bad as the earlier work was good. The premise was deeply flawed. People were not rational, profit-maximizing machines — they were emotional, error-prone actors who often operated against their own best interests. Information efficiency was a nice concept, but it simply did not work in the real world.
The Nobel committee resolved this problem quite elegantly.
Unbeknownst to Fama the Elder, he had an adversary 1,000 miles away. On the ivy-covered campus of Yale, a young man decided that the efficient-market hypothesis made no sense. Professor Robert Shiller’s data overwhelmingly showed that markets were at times as irrational as the humans who traded them. His 1989 book on market volatility found that price fluctuations in speculative markets were not rational and did not reflect all known information. Price action moved so much more than future dividends changed that something else had to be at work. That factor was human behavior.
Bubbles formed, prices detached from reality, then just as soon came back to Earth. This was hardly informational efficiency. After the 1987 crash, Shiller remarked, “The efficient-markets hypothesis is the most remarkable error in the history of economic theory.” Indeed, much of Shiller’s work over the next 20-plus years was railing against the hypothesis’s obvious failings. Warning of the tech bubble late in 1999 and then of the housing bubble in 2006 served to cement Shiller’s reputation, as well as his views that markets were irrational. Sometimes prices had nothing whatsoever to do with the available information — except the insight that people occasionally went crazy.
So the Nobel committee could recognize Fama the Younger, awarding him the prize for his work on unpredictability. But it could distance itself from the silliness of Fama the Elder, by having the Younger share the award with Shiller.
And that is how the most astute critic of the efficient-market hypothesis helped its creator win a Nobel Prize in economics.

From Business Insider i agree to it

Yale University professor Robert Shiller was one of three people to win the 2013 Sveriges Riksbank Prize in Economic Sciences (also known as the Nobel Prize in Economics). Shiller is already a god among economists. He famously predicted two of the biggest bubbles of all time: the dot-com bubble and the housing bubble. Both times, he published an edition of his book Irrational Exuberance, which described and predicted each respective bubble.
The theme of this year's award "Trendspotting in asset markets," and the Nobel committee pointed to Shiller's work in forecasting intermediate-term moves in asset prices.
"He found that stock prices fluctuate much more than corporate dividends, and that the ratio of prices to dividends tends to fall when it is high, and to increase when it is low," said the Nobel Committee. "This pattern holds not only for stocks, but also for bonds and other assets."
Shiller regularly updates his data and makes it available for free online.
He is responsible for two charts, that everyone in finance follow very closely.
The first chart is of the cyclically-adjusted price-earnings (CAPE) ratio. CAPE is calculated by taking the S&P 500 and dividing it by the average of ten years worth of earnings. If the ratio is above the long-term average of around 16, the stock market is considered expensive. Shiller has argued that the CAPE is remarkably good at predicting returns over the period of several years.
As you can see, the CAPE ratio reached insanely high levels during the dotcom bubble.

Yale

The second chart is of a long-term look at home prices adjusted for inflation.
During the early 2000s, home prices took off, forcing Shiller to publish the second edition of Irrational Exuberance.
As you can see, homes are not great assets if you're looking for real returns.
"Housing traditionally is not viewed as a great investment," he told Bloomberg's Trish Regan earlier this year. "It takes maintenance, it depreciates, it goes out of style. All of those are problems. And there's technical progress in housing. So, new ones are better.
"So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000's. And I don't expect it to come back. Not with the same force. So people might just decide, "Yeah, I'll diversify my portfolio. I'll live in a rental." That is a very sensible thing for many people to do."

Yale

No one will argue that Shiller wasn't deserving of the Nobel prize. If anything, it was long overdue.

Nobel fever

According to Google Scholar, Fama and Jensen (1983) is Fama’s third most cited paper, yet it isn’t mentioned at all in the scientific summary put out by the Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences, which, if I remember correctly, sometimes does mention work that is not directly related to what the prize is being awarded for. In this case it is particularly tragic because Fama’s corporate governance papers are very good, and considered by some* to be much better than his asset pricing work. (A phrase which rhymes with “feta pining” is sometimes whispered in connection with the latter.)

I am talking about a pair of papers published back to back in the same issue of the Journal of Law and Economics in 1983; this is the other one. They are joint work with Michael Jensen, who is well known for his later corporate governance work and who is also the Jensen of “Jensen’s alpha” (these guys were generalists, of sorts). Go read them right now. They are very good, there is no math, I have linked to ungated versions, and their explanation is probably clearer than mine.

Both problems are about the separation of ownership and control, a feature seen in most organizations, both for-profit and non-profit. The academic study of organizations dates back to at least 1889, or even 1776, but who still reads Adam Smith?

If the owner of an enterprise exercises full control over its operations, as is the case in a sole proprietorship with few or no employees, there is no agency problem: the manager–owner can be trusted to make whatever decisions will maximize his profit (or whatever he is maximizing, when it is not a for-profit firm), and will even make appropriate tradeoffs between the short term and the long term.

In the real world, that’s not practical. Despite what Adam Smith might have preferred, modern firms (both for-profit and non-profit)—or even the commercial partnerships in the Middle Ages that Weber studied—are too large to be owned by one person or even a family and too complicated to be managed by a large group of stakeholders. If contracts could be perfectly specified and made contingent on every eventuality, there wouldn’t be a problem: the management contract would specify what the manager has to do no matter what happens, and the contract would be written to maximize profits. Of course this is even more unrealistic than thousands or millions of shareholders collectively making all the decisions of a firm.

Fama and Jensen’s analysis starts with the role of residual claims. Some claimants on a firm are promised fixed amounts that they will receive when the cash flows are paid out. For example, a bank or a group of bondholders that makes a loan to a business will only receive the amount that was actually borrowed, plus interest. The firm might go bankrupt, but hopefully in all probability the bank will simply be paid what it was promised. This means that by and large, they won’t care too much about the firm’s management decisions. Only the residual claimants, who in a typical corporation are the shareholders, need to fret about the firm’s management from day to day. In turn, they will bear most of the risk associated with the firm’s operations, and also receive the rewards if the firm is better managed than expected.

At a granular level, the agency problem is about making decisions. Fama and Jensen split up the decision process into decision management, which involves initiating decisions (coming up with the idea) and implementing decisions (actually doing the work), and decision control, which involves ratifying or approving decisions and monitoring that they are carried out faithfully. We now end up with three roles: residual claimant, decision management and decision control.

Some undertakings are “noncomplex”: the necessary information can be concentrated in a few people. Examples include small firms, as well as large firms with relatively simple decisions such as mutual funds and other mutual financial firms. In noncomplex organizations it can be optimal to combine decision management and decision control to economize on decision costs, but then you would have the foxes watching the henhouse. Who looks after the interests of residual claimants? The answer is that when decision management and decision control are combined, you would often restrict residual claims to a small group of people who either are managers or trust them, for example family members and close business associates. Partnerships and small corporations with stock transfer restrictions examples of what Fama and Jensen call “closed corporations”. The tradeoff is that you reduce the possibility of risk sharing and some efficiency is lost that way.

In more complex organizations, decision management would be separated from decision control. The information necessary to make decisions may be diffused among a lot of people, who would each be responsible for initiating and implementing decisions in their little area, but a few people—the managers, who would also be the residual claimants or close family members or business associates—could handle decision control, ratifying and monitoring the decision managers.

In large corporations with a lot of assets, you need more residual claimants to share risk, which in turn makes it impractical for all the residual claimants to participate in monitoring, and the agency problems associated with combining decision management and decision control are worsened. For such organizations, Fama and Jensen hypothesize, decision management and decision control will tend to be separated. In the largest corporations, this separation is complete, and residual claimants have almost zero participation in decision control.

Fama and Jensen also survey a variety of organizational forms that have different tradeoffs between the three roles and ways in which separation is achieved, for example with expert boards and through the market for takeovers. In financial mutuals, a large body of customers are also owners, and decision control is delegated to a professional board of directors, but an additional control function exists in the ability of each residual claimant to quickly and easily terminate his or her claims by redeeming the claim.

In nonprofit organizations, there are no residual claimants as such, which Fama and Jensen justify as a means of reducing the conflict between donors and residual claimants. Who would want to give a donation what will ultimately end up in the pockets of residual claimants? The solution: eliminate the latter. In US nonprofits, decision control is typically exercised by a board of directors that consists of large donors.

In the Roman Catholic Church, control is not exercised by donors (parishioners), but by the church hierarchy itself, and ultimately the Pope, with almost no separation between decision management and decision control. The solution is vows of chastity and obedience that bind the hierarchy to the organization, in exchange for lifetime employment. Fama and Jensen go on to claim that Protestantism is a response to the breakdown of this contract, and that “the evolution of Protestantism is therefore an example of competition of among alternative contract structures to resolve an activity’s major agency problem—in this case monitoring important agents to limit expropriation of donations.”

NOBEL economics

I cant resist writing for this year economics prizes Bob, Gene , Hans. I have read Shiller most and one of the reason to learn finance  , Fama is found in text books too often and Hansen is a pioneer in technical economics ( econometrics). Well , I would be talking mostly of Bob Shiller then Gene but Hansen work is too technical for me to talk about as his model for volatility is praised by pioneers in Econometrics but the truth is that  i am too young to seriously talk about their innovative  work .
Bob did (with Grossman and Melino) some of the best and earliest work on the consumption model, and his work on real estate and innovative markets is justly famous.  But, space is limited so again I'll just focus on volatility and predictability of returns which is at the core of the Nobel. 

Source: American Economic Review

The graph on the left comes from Bob's June 1981  American Economic Review paper. Here Bob contrasts the actual stock price p with the "ex-post rational" price p*, which is the discounted sum of actual dividends. If price is the expected discounted value of dividends, then price should vary less than the actual discounted value of ex-post dividends.  Yet the actual price varies tremendously more than this ex-post discounted value.

This was a bombshell. We Indian students were small in numbers to read it but those who knew Shiller enjoyed reading him  It said to those of us watching at the time that we pupils in this side of the world were missing the boat. Sure, you can't forecast stock returns. But look at the wild fluctuations in prices! That can't possibly be efficient. It looks like a whole new category of test, an elephant in the room that the Fama crew somehow overlooked running little regressions.  It looks like prices are incorporating information -- and then a whole lot more!  Shiller interpreted it as psychological and social dynamics, waves of optimisim and pessimism.
Read the citations in the Nobel Committe's  "Understanding Asset Prices." John Campbell's list is three times as long and distinguished.  

So, in the end, what do we know? A modern volatility test starts with the Campbell-Shiller linearized present value relation

Here p=log price, d=log dividend, r=log return and rho is a constant about 0.96. This is just a clever linearization of the rate of return -- you can rearrange it to read that the long run return equals final price less initial price plus intermediate dividends. Conceptually, it is no different than reorganizing the definition of return to

You can also read the first equation as a present value formula. The first term says prices are higher if dividends are higher. The second term says prices are higher if returns are lower -- the discount rate effect. The third term represents "rational bubbles."  A price can be high with no dividends if people expect the price to grow forever.

Since it holds ex-post, it also holds ex-ante -- the price must equal the expected value of the right hand side. And now we can talk about volatilty: the price-dividend ratio can only vary if expected dividend growth, expected returns, or the expected bubble vary over time. 

Likewise, multiply both sides of the present value identity by p-d and take expectations. On the left, you have the variance of p-d. On the right, you have the amount by which p-d forecasts dividend growth, returns, or future p-d. The price-dividend ratio can only vary if it forecasts future dividend, growth, future returns, or its own long-run future. 

The question for empirical work is, which is it? The surprising answer: it's all returns. You might think that high prices relative to current dividends mean that markets expect dividends to be higher in the future. Sometimes, you'd be right. But on average, times of high prices relative to current dividends (earnings, book value, etc.) are not followed by higher future dividends. On average, such times are followed by lower subsequent long-run returns.

Shiller's graph we now understand as such a regression: price-dividend ratios do not forecast dividend growth. Fortunately, they do not forecast the third term, long-term price-dividend ratios, either -- there is no evidence for "rational bubbles." They do forecast long-run returns. And the return forecasts are enough to exactly account for price-dividend ratio volatility!

Starting in 1975 and continuing through the late 1980s, Fama and coauthors, especially Ken French, were running regressions of long-run returns on price-dividend ratios, and finding that returns were forecastable and dividend growth (or the other "complementary" variables) were not. So, volatility tests are not something new and different from regressions. They are exactly the same thing as long-run return forecasting regressions. Return forecastability is exactly enough to acount for price-dividend volatility.  Price-dividend volatility is another implication of return forecastability-- and an interesting one at that! (Lots of empirical work in finance is about seeing the same phenomenon through different lenses that shows its economic importance.)

And the pattern is pervasive across markets. No matter where you look, stock, bonds, foreign exchange, and real estate, high prices mean low subsequent returns, and low prices (relative to "fundamentals" like earnings, dividends, rents, etc) mean high subsequent returns.

These are the facts, which are not in debate. And they are a stunning reversal of how people thought the world worked in the 1970s. Constant discount rate models are flat out wrong.

So, does this mean markets are "inefficient?" Not by itself. One of the best parts of Fama's 1972 essay was to prove a theorem: any test of efficiency is a joint hypothesis test with a "model of market equilibrium." It is entirely possible that the risk premium varies through time. In the 1970s, constant expected returns were a working hypothesis, but the theory long anticipated time varying risk premiums -- it was at the core of Merton's 1972 ICAPM -- and it surely makes sense that the risk premium might vary through time.

So here is where we are: we know the expected return on stocks varies a great deal through time. And we know that time-variation in expected returns varies exactly enough to account for all the puzzling price volatility. So what is there to argue about? Answer: where that time-varying expected return comes from.

To Fama, it is a business cycle related risk premium. He (with Ken French again) notices that low prices and high expected returns come in bad macroeconomic times and vice-versa. December 2008 was a recent  time of low price/dividend ratios. Is it not plausible that the average investor, like our endowments,  said, "sure, I know stocks are cheap, and the long-run return is a bit higher now than it was. But they are about to foreclose on the house, reposess the car, take away the dog, and I might lose my job. I can't take any more risk right now." Conversely, in the boom, when people "reach for yield", is it not plausible that people say "yeah, stocks aren't paying a lot more than bonds. But what else can I do with the money? My business is going well.  I can take the risk now."

To Shiller, no. The variation in risk premiums is too big, according to him, to be explained by variation in risk premiums across the business cycle. He sees irrational optimism and pessimism in investor's heads. Shiller's followers somehow think the government is more rational than investors and can and should stabilize these bubbles. Noblesse oblige.

How are we to resolve this debate? At this level, we can't. That' the whole point of Fama's joint hypothesis theorem and its modern descendants (the existence of a discount factor theorems). "Prices are high, risk aversion must have fallen" is as empty as "prices are high, there must be a wave of irrational optimism." And as empty as "prices are high, the Gods must be pleased." To advance this debate, one needs an economic or psychological model, that independently measures risk aversion or optimisim/pessimism, and predicts when risk premiums are high and low. If we want to have Nobels in economic "science," we do not stop at story-telling about regressions.

John Campbell  (Interestingly, Shiller was John's PhD adviser and frequent coauthor) wrote such a model, in "By Force of Habit". It uses the history of consumption and an economic model as an independent measure of time varying risk aversion. Like any model that makes a rejectable hypothesis, it fits some parts of the data and not other. It's not the end of the story, but it is, I think, a good example of the kind of model that can  make progress.

I am a little frustrated by behavioral writing that has beautiful interpretive prose, but no indpendent measure of fad, or at least no number of facts explained greater than number of assumptions made. Fighting about who has the more poetic interpretation of the same regression, in the face of a theorem that says both sides can explain it, seems a bit pointless. But an emerging literature is trying to do with psychology what Campbell and I did with simple economics. Another emerging literature on "institutional finance" ties risk aversion to internal frictions in delegated management.

That's where we are. Which is all a testament to Fama, Shiller, Hansen, and asset pricing. These guys led a project that assembled a fascinating and profound set of facts. Those facts changed 100% from the 1970s to the 1990s. We agree on the facts. Now is the time for theories to understand those facts.  Real theories, that make quantitative predictions (it is a quantiative question: how much does the risk premium vary over time), and more predictions than assumptions.

If it all were settled, their work would not merit the huge acclaim that it has, and deserves. Rather than attempting a comprehensive overview of Shiller's work, in this post I would like to focus on "Radical Financial Innovation," which appeared as a chapter in Entrepreneurship, Innovation and the Growth Mechanism of the Free Market Economies, in Honor of William Baumol (2004).

The chapter begins with some brief but powerful observations:

According to the intertemporal capital asset model... real consumption fluctuations are perfectly correlated across all individuals in the world. This result follows since with complete risk management any fluctuations in individual endowments are completely pooled, and only world risk remains. But, in fact, real consumption changes are not very correlated across individuals. As Backus, Kehoe, and Kydland (1992) have documented, the correlation of consumption changes across countries is far from perfect…Individuals do not succeed in insuring their individual consumption risks (Cochrane 1991). Moreover, individual consumption over the lifecycle tends to track individual income over the lifecycle (Carroll and Summers 1991)... The institutions we have tend to be directed towards managing some relatively small risks."

Shiller notes that the ability to risk-share does not simply arise from thin air. Rather, the complete markets ideal of risk sharing developed by Kenneth Arrow "cannot be approached to any significant extent without an apparatus, a financial and information and marketing structure. The design of any such apparatus is far from obvious." Shiller observes that we have well-developed institutions for managing the types of risks that were historically important (like fire insurance) but not for the significant risks of today. "This gap," he writes, "reflects the slowness of invention to adapt to the changing structure of economic risks."

The designers of risk management devices face both economic and human behavioral challenges. The former include moral hazard, asymmetric information, and the continually evolving nature of risks. The latter include a variety of "human weaknesses as regards risks." These human weaknesses or psychological barriers in the way we think about and deal with risks are the subject of the behavioral finance/economics literature. Shiller and Richard Thaler direct the National Bureau of Economic Research working group on behavioral economics.

To understand some of the obstacles to risk management innovation today, Shiller looks back in history to the development of life insurance. Life insurance, he argues, was very important in past centuries when the death of parents of young children was fairly common. But today, we lack other forms of "livelihood insurance" that may be much more important in the current risk environment.

"An important milestone in the development of life insurance occurred in the 1880s when Henry Hyde of the Equitable Life Assurance Society conceived the idea of creating long-term life insurance policies with substantial cash values, and of marketing them as investments rather than as pure insurance. The concept was one of bundling, of bundling the life insurance policy together with an investment, so that no loss was immediately apparent if there was no death. This innovation was a powerful impetus to the public’s acceptance of life insurance. It changed the framing from one of losses to one of gains…It might also be noted that an educational campaign made by the life insurance industry has also enhanced public understanding of the concept of life insurance. Indeed, people can sometimes be educated out of some of the judgmental errors that Kahneman and Tversky have documented…In my book (2003) I discussed some important new forms that livelihood insurance can take in the twenty-first century, to manage risks that will be more important than death or disability in coming years. But, making such risk management happen will require the same kind of pervasive innovation that we saw with life insurance."

Shiller has also done more technical theoretical work on the most important risks to hedge:

"According to a theoretical model developed by Stefano Athanasoulis and myself, the most important risks to be hedged first can be defined in terms of the eigenvectors of the variance matrix of deviations of individual incomes from world income, that is, of the matrix whose ijth element is the covariance of individual I’s income change deviation from per capita world income change with individual j’s income change deviation from per capita world income change. Moreover, the eigenvalue corresponding to each eigenvector provides a measure of the welfare gain that can be obtained by creating the corresponding risk management vehicle. So a market designer of a limited number N of new risk management instruments would pick the eigenvectors corresponding to the highest N eigenvalues."

Based on his research, Shiller has been personally involved in the innovation of new risk management vehicles. In 1999, he and Allan Weiss obtained a patent for "macro securities," although their attempt in 1990 to develop a real estate futures market never took off.

9 Mind-Blowing Facts About Money

Cheen= China:

• Invented every single major form of currency: metal coins, paper money, and fiat currency not backed by precious metals

• Seized gold six centuries before Franklin Roosevelt, in order to prop up its fiat currency and prevent runaway inflation

Debt Forgiveness Is The Basis for Modern Civilization

Religions were founded on the concept of debt forgiveness.
For example, Matthew 6:12 says:

And forgive us our debts, as we forgive our debtors.

Periodic times of debt forgiveness – or debt “jubilees” – were a basic part of the early Jewish and Christian religions, as well as Babylonian culture.
David Graeber, author of “Debt: The First 5,000 Years” told Democracy Now:

If you look at the history of world religions, of social movements what you find is for much of world history what is sacred is not debt, but the ability to make debt disappear to forgive it and that’s where concepts of redemption originally come from.

Ambrose Evans-Pritchard wrote in 2009:

In the end, the only way out of all this global debt may prove to be a Biblical debt Jubilee.

Indeed, the first recorded word for “freedom” in any human language is the word for freedom from debt.
(Moreover, there is a long-standing legal principle that people should not have to repay their government’s debt to the extent that it is incurred to launch aggressive wars or to oppress the people … what is called “odious debt”).

The Real Reason Money Was Created?

Everyone was taught that money was invented to replace the messy business of barter. It’s hard work walking my cow all the way to your village to trade for firewood … and then carrying all of that firewood back home. And what if no one wants my cow?
But economist Charles Goodhart – a former member of the Bank of England’s Monetary Policy Committee – anthropologist David Graeber, and other experts on the history of money say that this is a myth.  (Bloomberg has written on this issue.)
Instead, they say that money was invented to finance war, and to keep score while armies went about pillaging and looting.

Lifespan of Currencies

The average life expectancy for a fiat currency is less than 40 years.
But what about “reserve currencies”, like the U.S. dollar?
JP Morgan noted last year that “reserve currencies” have a limited shelf-life:
As the table shows, U.S. reserve status has already lasted as long as Portugal and the Netherland’s reigns.
Will the dollar last as long as Spain, France or Britain’s reserve currencies?  It’s impossible to know.
But given that the dollar’s reserve status has been slipping away for many years – and that the European Union (the world’s largest economy) has now entered into a currency swap agreement with China – the dollar’s reign may only have a couple of years left.

Big Banks Are Not Really In the Banking Business

Everyone thinks of banks as holding our deposits safe, and extending loans based upon the amount of deposits they hold in their vaults.
This is no longer true.
The big banks currently do very little traditional banking. Most of their business is from financial speculation (which, sadly, metastasizes into manipulation and criminal behavior).
For example, less than 10% of Bank of America’s assets come from traditional banking deposits.
Time Magazine gave some historical perspective in 1993:

What would happen to the U.S. economy if all its commercial banks suddenly closed their doors? Throughout most of American history, the answer would have been a disaster of epic proportions, akin to the Depression wrought by the chain-reaction bank failures in the early 1930s. But [today] the startling answer is that a shutdown by banks might be far from cataclysmic.
***
Who really needs banks these days? Hardly anyone, it turns out. While banks once dominated business lending, today nearly 80% of all such loans come from nonbank lenders like life insurers, brokerage firms and finance companies. Banks used to be the only source of money in town. Now businesses and individuals can write checks on their insurance companies, get a loan from a pension fund, and deposit paychecks in a money-market account with a brokerage firm. “It is possible for banks to die and still have a vibrant economy,” says Edward Furash, a Washington banks consultant.

Indeed, even though the taxpayers have thrown trillions of dollars at the “too big to fail” banks, they largely stopped loaning to Main street … and it was only the smaller banks that kept making loans.

Inequality Today In America Is Worse than In Ancient Slave-Owning Societies

Inequality is much worse than you think …
Indeed, inequality in America today is twice as bad as in ancient Rome, worse than it was in Tsarist Russia, Gilded Age America, modern Egypt, Tunisia or Yemen, many banana republics in Latin America, and worse than experienced by slaves in 1774 colonial America.

Quantitative Easing Hurts the Economy

81.5% of all money created through quantitative easing is sitting there gathering dust … instead of helping the economy.
Indeed, quantitative easing actually hurts the economy, Main Street, and the average American.

Yes, The U.S. Has Defaulted

It is widely stated that the U.S. government has never defaulted.  In reality, the U.S. has partially or fully defaulted on numerous occasions.

How Money Is Really Created

Banks create money out of thin air, without regard to whether or not they have deposits on hand.
This sounds like an outrageous statement … but the Federal Reserve has said as much.
For example, a 1960s Chicago Federal Reserve Bank booklet entitled “Modern Money Mechanics” said:

[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts.

Economist Steve Keen notes:

As long as 4 decades ago, the actual situation was put very simply by the then Senior Vice President, Federal Reserve Bank of New York, Alan Holmes. Holmes explained why the then faddish Monetarist policy of controlling inflation by controlling the growth of Base Money had failed, saying that it suffered from “a naive assumption” that:

The banking system only expands loans after the [Federal Reserve] System (or market factors) have put reserves in the banking system. In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand; over time, its influence can obviously be felt. (Alan R. Holmes, 1969, p. 73; emphasis added)

Moreover:
(1) William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, said in a speech in July 2009:

Based on how monetary policy has been conducted for several decades, banks have always had the ability to expand credit whenever they like. They don’t need a pile of “dry tinder” in the form of excess reserves to do so. That is because the Federal Reserve has committed itself to supply sufficient reserves to keep the fed funds rate at its target. If banks want to expand credit and that drives up the demand for reserves, the Fed automatically meets that demand in its conduct of monetary policy. In terms of the ability to expand credit rapidly, it makes no difference.

(2) On February 10, 2010, Ben Bernanke proposed the elimination of all reserve requirements:

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

Under the current fractional reserve banking system, banks can loan out many times reserves. But even that system is being turned into a virtually infinite printing press for banks.
Germany’s central bank – the Deutsche Bundesbank (German for German Federal Bank) – has also admitted in writing that banks create credit out of thin air.
Steve Keen points out that 2 Nobel-prize winning economists have shown that the assumption that reserves are created from excess deposits is not true:

The model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.
The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth.
Looking at the timing of economic variables, they found that credit money was created about 4 periods before government money. However, the “money multiplier” model argues that government money is created first to bolster bank reserves, and then credit money is created afterwards by the process of banks lending out their increased reserves.
Kydland and Prescott observed at the end of their paper that:
Introducing money and credit into growth theory in a way that accounts for the cyclical behavior of monetary as well as real aggregates is an important open problem in economics.

In other words, if the conventional view that excess reserves (stemming either from customer deposits or government infusions of money) lead to increased lending were correct, then Kydland and Prescott would have found that credit is extended by the banks (i.e. loaned out to customers) after the banks received infusions of money from the government. Instead, they found that the extension of credit preceded the receipt of government monies.
Indeed, Keen says that 25 years of research proves that creation of debt by banks precedes creation of government money, and that debt money is created first and precedes creation of credit money.
This angle of the banking system has actually been discussed for many years by leading experts:
“The process by which banks create money is so simple that the mind is repelled.”
- Economist John Kenneth Galbraith
“[W]hen a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposit; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.“
- Robert B. Anderson, Secretary of the Treasury under Eisenhower, in an interview reported in the August 31, 1959 issue of U.S. News and World Report
“Do private banks issue money today? Yes. Although banks no longer have the right to issue bank notes, they can create money in the form of bank deposits when they lend money to businesses, or buy securities. . . . The important thing to remember is that when banks lend money they don’t necessarily take it from anyone else to lend. Thus they ‘create’ it.”
-Congressman Wright Patman, Money Facts (House Committee on Banking and Currency, 1964)
“The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented.”
- Sir Josiah Stamp, president of the Bank of England and the second richest man in Britain in the 1920s.
“Banks create money. That is what they are for. . . . The manufacturing process to make money consists of making an entry in a book. That is all. . . . Each and every time a Bank makes a loan . . . new Bank credit is created — brand new money.”
- Graham Towers, Governor of the Bank of Canada from 1935 to 1955.
Additionally, in First National Bank v. Daly (often referred to as the “Credit River” case) the court found that the bank created money “out of thin air”:

[The president of the First National Bank of Montgomery] admitted that all of the money or credit which was used as a consideration [for the mortgage loan given to the defendant] was created upon their books, that this was standard banking practice exercised by their bank in combination with the Federal Reserve Bank of Minneaopolis, another private bank, further that he knew of no United States statute or law that gave the Plaintiff [bank] the authority to do this.

The court also held:

The money and credit first came into existence when they [the bank] created it.

(Here’s the case file).
Justice courts are just local courts, and not as powerful or prestigious as state supreme courts, for example. And it was not a judge, but a justice of the peace who made the decision.
But what is important is that the president of the First National Bank of Montgomery apparently admitted that his bank created money by simply making an entry in its book ….
Moreover, although it is counter-intuitive, virtually all money is actually created as debt. For example, in a hearing held on September 30, 1941 in the House Committee on Banking and Currency, then-Chairman of the Federal Reserve (Mariner S. Eccles) said:

That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.

Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta, said:

If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.

(Former Fed chairman Alan Greenspan was so worried that the U.S. would pay off it’s debt – causing the fed to “lose control of monetary policy” – that he suggested tax cuts for the wealthy for the purpose of increasing the debt.)
There is a growing movement to give the power to create money and credit back to the government, so that the people can save many billions of dollars in interest payments to the big banks.
But the giant banks are close to negotiating a secret trade treaty which would allow them to keep their monopoly on money creation.

unhappy NOBEL

THE Nobel prizes in physiology or medicine, physics and chemistry are the most prestigious gongs in science. The annual announcement of the winners is a big event in the scientific calendar, as is the ritzy party that takes place on December 10th to honour the winners directly. But talk to scientists in private, and many will grumble. The Nobels are a great way to get people interested in science, they’ll say, and it’s good that we have them. But there have been strange omissions, with people who should have won a prize denied. The grumpiest complain that despite the glitz of the prizes, and the ensuing media attention in articles like this one, their rules that govern them no longer reflect the way modern science works. Why (besides jealousy, perhaps) are some scientists unhappy with the Nobels?
One reason is that the committees can often be slow to recognise achievement. Alfred Nobel, the dynamite magnate who set up the prizes in 1895 (pictured above), specified in his will that the gongs should reward work done in the previous year. But experience soon showed that this was risky, as medals were given out for discoveries that later proved questionable. So a degree of caution is probably advisable. Sometimes, though, it can be taken too far. Subrahmanyan Chandrasekhar, for instance, had to wait until 1983 to win a prize for work he had done in the 1930s on the structure of stars. And caution can sometimes lead to strange results. Albert Einstein never won a prize for his theory of relativity (although he did get one in 1921 for discovering the photoelectric effect). Even though some pretty suggestive evidence had been produced by Arthur Eddington in 1919, relativity—which has subsequently passed every experimental test ever thrown at it—was still considered somewhat risky and recondite.
Another criticism concerns the tradition that no more than three people can share a prize. Science is rarely this clear-cut. Take this year’s physics prize, which recognised Peter Higgs for predicting the existence of the mass-bestowing particle that now bears his name. Dr Higgs was only one of several people with a claim. Two other teams—Robert Brout and François Englert, as well as Gerald Guralnik, Carl Hagen and Tom Kibble—submitted papers on the same idea to the same journal that published Dr Higgs’s work, all within a few months of each other. Science often works like this, with different people coming up with similar ideas at similar times. In the event, the committee decided to honour Dr Englert (Brout is dead, and therefore ineligible), whose paper was earlier than Dr Higgs’s but did not explicitly predict a particle, over Dr Guralnik and his collaborators, who were more comprehensive but a few weeks late.
The rule of three also reinforces the idea that science is carried out by a handful of geniuses, toiling by themselves in ivory towers. If that was ever true, it isn’t now. Drs Higgs and Englert won this year because their prediction was confirmed by the discovery last year of the Higgs boson. It was uncovered by CERN, which runs the Large Hadron Collider, the world’s biggest particle accelerator. The LHC cost billions to build and employs thousands of scientists and thousands more technicians to analyse the data it produces and keep its beams humming. The papers announcing the boson’s discovery had hundreds of authors. Nor is it just physics. Big science, complicated machines and papers with half a dozen authors or more are now the rule rather than the exception in many disciplines, and that trend will only intensify as science becomes both more specialised and more collaborative. There was speculation this year that the Nobel committee would break with another tradition, that organisations are not honoured in the science prizes, and give part of the physics gong to CERN itself. But they didn’t. The rules specified in Nobel's will have been reinterpreted in the past. It may be time to rejig them once again.