Anna Schwartz

THE SCHUMPETER The Economics Society Magazine

Issue 2

Ashes to Ashes: Hedge Funds' Fluctuating Tendancies Fahad Memon

Route 66: The Death of American Infrastructure Tim Robinson

Financial Reform Joao Marinho

Web 2.0 is the Future of the Corporate World Sammy Sung

Why Has the UK Not Adopted the Metric System? David Osborne

The Monetarists Tim Robinson

Does Monetary Policy Need an Upgrade? Aime Sindayigaya

Thomas Aquinas: An Economist for our Time? David Osborne

News and Extra

The Economics Society Magazine is funded by member contributions, and relies on the contribution of students and lecturers for articles. If you would like to get involved writing for us please email: [email protected]

Ashes to Ashes: Hedge Funds' Fluctuating Tendencies - By Fahad Memon

Much like any team sport, areas of investment factor in many key elements that help skew the game in one side’s favour. Among these are field conditions, weather conditions, team cohesiveness and a matter of luck (though for investments, these aptly apply both literally as well as metaphorically). The field conditions favoured an array of hedge funds: lack of industrial regulation and disclosure requirements coupled with an enormous sum of financial-backing, spells prime prospects for any profit-centric organization. Moreover, with a growing financial sector and an ever-present effort to reduce potential losses in market operations, the sun shone ripe with opportunity. Though provided with a great business environment, hedge funds have been plagued with poor form and horrible fortunes, which for the most part of their 60-year history have denied them consistent top honours. Though ascending to great heights is no easy task, ensuring that the pressure does not deter you from achieving and maintaining presidential status is equally vital. The hedge fund industry’s history is highlighted by inclinations to reach high, but cursed with near-death experiences; achieving prominence in the early 1960s by outclassing mutual funds by double-digit figures yet incurring huge losses going into the 1970s. Emerging yet again during the 1980s-90s with promising hedge funds, the likes of John Meriwether’s Long-Term Capital Management (two years of 40% absolute returns), Julian Robertson’s Tiger Fund (31.7% absolute returns, as reported in August 1998), Renaissance Technologies’ Medallion Fund (averaging 35% annual returns after fees since 1989) and George Soros’ Quantum Group of Funds (41% annual returns after fees for the better part of the 1990s). Nevertheless, while QGF stirred controversy within the confines of the Bank of England in 1992 by devaluing the strong pound; the aforementioned former two (LTCM and Tiger) collapsed horrendously in 1998 and 2000 respectively. Today, with the likes of Renaissance Technologies, Man Group PLC and Soros Fund Management LLC, hedge funds have acquired a fair degree of stability with regard to its business

climate. With performances accumulating assets to the value of $2.68 trillion by the end of 2007, as reported by the 2008 Hedge Fund Asset Flows and Trends Report, the industry appeared set to eclipse its inauspicious past. Unfortunately, with the world, and more specifically the financial sector, at the mercy of a global crisis: hedge funds were no doubt likely to meet their share of problems. As banks entrapped themselves in a sub-prime lending fiasco, hedge funds became sitting targets; namely by Porsche and Bernard Madoff. In late October 2008; to the horror of an abundance of hedge funds, whom assumed short positions on Volkswagen shares (expecting future prices to go down; they in effect opted to sell their shares at higher prices and reacquire them at cheaper values), Porsche revealed a 74% stake in the German motor company. With another 20% held by the German state of Lower Saxony, hedge funds anticipated a short squeeze scenario given only 6% of shares were unassigned. Volkswagen share prices skyrocketed as numerous hedge funds sought after covering their short positions and minimizing their losses. The car manufacturer subsequently became the world’s most valuable business (through market capitalization), regardless of peoples’ demand for Volkswagen vehicles as the share price exceeded €1,000. Hedge funds bawled as they hopelessly watched their industrial infrastructure break down before them.

Bernie Madoff, mugshot (US Department of Justice)

Nonetheless, with the manslaughter of Porsche-Volkswagen still in effect, another calamity arrived in the form of arguably the greatest con in the history of finance. The announcement, in December 2008, revealing Mr. Madoff’s business affair, which captivated countless hedge funds with its low volatility appeal, was fundamentally a Ponzi scheme. Also known as a pyramid scheme; it rewards investors with guaranteed high returns from their own investment capital. There is essentially no formal business activity attached to the generation of these proceedings as promised gains fuel successive reinvestments, allowing for antics to be carried on for a prolonged period. The list of Madoff’s investors, representing a who’s who of hedge funds, as well as other members of the economy; who adamantly flocked into the trap, sought little reason to suspect the falsified verisimilitude. Considering that a former NASDAQ chairperson was running the ship, who would question the undertakings? Certainly not the U.S. Securities and Exchange Commission (SEC), whom felt no sense of unconventionality as pertained to Bernard Madoff’s money-making procedures despite countless ‘red flags.’ Among the hedging victims was AIA (Access International Advisors), which suffered an incredible $1.5 billion, including money personally invested by fund manager René Thierry Magon de la Villehuchet. Denoting feelings of grief and responsibility for losing such sizeable sums from his highly-esteemed European clients, de la Villehuchet committed suicide and was found dead in his office on December 23rd, 2008. Counting all other individuals and entities; ranging from celebrity figures like Steven Spielberg to financial intermediaries, such as HSBC, and foundations, like New York Law School (via Ascot Partners), Madoff’s asset management operations have caused $50 billion worth of damages. At present Bernard Madoff faces a lengthy 150-year prison term and $170 billion forfeiture of wealth. A conspicuous scar has been left on the reputation of many high-profile hedge funds the like of Man Group and Tremont Capital Management whom “charge whooping fees… largely on the basis of their ability to pick out clever people to manage their clients’ money.”1 With recent overwhelming debacles, their unregulated freedom may also be under threat with the SEC seeking to continue to its aim for implementing further laws for disclosure in order

to protect investors. The hedge fund industry has crumbled yet again, and despite the fact that history illustrates inevitable resurgence, the question to ask: is this round of trials and tribulations over yet? Or will the mess left behind by Porsche, Madoff and the financial sector as a whole result in, as The Economist predicts: “perhaps half of all hedge funds [going out] out of business”? Fahad Memon is a Financial Economics Student at The City University London.

1. The Economist, issue 51 of 2008, p.20, “The Madoff affair; Dumb money and dull diligence,” paragraph 5, lines 4-6

Route 66: The Problem of American Infrastructure - By Timothy Robinson

"Sixty-Six is the path of a people in flight" - 'The Grapes of Wrath', Steinbeck "The Mojave Desert is almost frightening...There is something infinitely wearying about seeing one summit after another prove to be an illusion, range replacing range with ruthless monotony." - 'The Ballad of Route 66', Christopher Hitchens "You'll see Amarillo Gallup, New Mexico Flagstaff, Arizona Don't forget Winona" - '(Get Your Kicks On) Route 66', Bobby Troup

"Once I built a railroad; now it's done. Brother, can you spare a dime? " - 'Brother, can you spare a dime?', E.Y. "Yip" Harburg

Tod Stiles and Buz Murdock drove down it in a Corvette in the CBS show 'Route 66'; Christopher Hitchens followed in their footsteps writing 'The Ballad of Route 66'; and Bobby Troup and Nat King Cole got their kicks on it. Route 66 is the iconic American highway which once stretched from its upper-Eastern point in Chicago, Illinois down to its lower-Western end in Los Angeles, California. It was in 1926 that Cyrus Avery persuaded the Joint Board of the American Association of State Highway Officials to route a road through his hometown of Tulsa, Oklahoma. Avery called this road, directed across the desolate plains, the 'Main Street of America', and in its heyday it became the 'path of a people in flight'; the artery of income for the small stores that dotted its length. Millions travelled along the road, and thousands made their living off the travelling mass. Route 66 Route 66 was built linking up a number of rural communities, allowing farmers to transport grain, and allowing trucking firms to operate across those areas. 66 became a highway in 1927, and was gradually paved over the next decade. Prior to the road there had been only a series of tracks and

pathways; the only feasible travel between the two cities was by rail. The Economic Slump The road was built against the backdrop of America enduring the plight of the Great Depression. It was these dire circumstance that allowed the transition of the road from its origin to a superhighway. The road surface changed from mostly gravelled to paved thanks to the labour available during the Depression Era exodus of mid America. This never more so than the movement of people escaping the Dust Bowl (centred around the Oklahoma and Texas panhandles). When the winds, and farming errors, began to destroy the plains agriculture (lack of grass roots to hold topsoil down helped the loss) it caused a mass migration of people, taking all they had, to start anew in the West. These people migrated to California and to work along Route 66. The builders of Route 66 were these local farmers, miners and villagers who flocked there, and by 1938 they had completed paving the road, the first US Highway to be so. The Rise of the Roadside Post War: the highway led to a boom in the economies of the towns along it, and a dearth of imagery, poetry and illusions to the American Dream. Along with Route 66 and the other highways came the inception of 'Service Stations', of roadside cafes and restaurants and the necessary maps and guides. The increase in road travel and vacation led to an increase in ranches and motels. Even as early as the 1930s the road saw a rise in food stalls, these expanded up until the wartime period. (The war saw a large drop in traffic, aside from the occasional military convoys) Most famously perhaps was the expansion of a small hot dog stand from and airport in Monrovia, California onto Route 66: In 1940 brothers Richard and Maurice McDonald built their stand in San Bernardino, California on Route 66. In 1948 they adapted it to focus sales on burgers and walk-up sales windows; McDonald's in its modern form was born. The second obvious implication of the rise of the highways, was the inception of the roadside petrol stations. By the beginning of the 30s the standard,

prefabricated designs started to be introduced to the road system by the Pure Oil Company, the Phillips Petroleum Company, and later by Texaco. Nick Freeth and Paul Taylor write in 'Travelling Route 66' of the road 'providing easy access to gas, water and other essentials.' Some of these remain, turned into makeshift taverns. The other major business was that of motels; most of those which were built along 66 were family owned operations, made popular first by the affordability and mass movement in the Depression and secondly by the post-World War 2 popularity of the automobile. The Symbol Tucumcari, New Mexico plays home to one of many monuments to Route 66: a sculpture of the numerals. (The number of the road was an interesting choice in itself; originally to be designated Route 60, Avery decided 66 had a more memorable ring to it.) Tucumcari itself is a monument to US construction projects. The city grew out of a 'tent city' built by the Pacific Railroad Company for the construction workers, notorious for gun fights it was originally called 'Six Shooter Siding'. One could also argue that part of the enduring legacy of Route 66 is not only one of hardship but, by virtue of it providing easier access to the West, it became a clarion call for those seeking the climate and palm trees of California. The End of the Road Route 66 began to die in 1956; President Dwight Eisenhower signed the Highway Act, and the famous road was bypassed by a series of strings of limited access highways which left the small towns along Route 66 ignored. It took about three decades for the slow decline as the interstate highway system was completed. The bypass destroyed the viability of the stores along the highway, and of the service stations, and the once popular motels. Large portions of the road simply ceased and gave way to the dirt tracks; many of those towns along its length vanished. In 1984 Williams, Arizona was the last town along Route 66 bypassed. In 1986 Route 66 was decommissioned. The road had left behind it a changed scenery, and the West coast had changed: from the frontier to the metropolis (the, now, most populous state in the Union) with one of the most dramatic movements of people in the US history, facilitated, enabled even, by Route 66.

Sculpture in Tucumcari, New Mexico

The Newest New Deal President Barack Obama had spoken of a National Infrastructure Reinvestment Bank ($60 Billion over 10 years to finance transportation projects) Now, with the news of recession, the talk has shifted from just the need to replace some of the United States' weakened infrastructure to the use of the investment as a stimulus. By placing $25 billion for immediate use into a 'Jobs and Growth Fund' for infrastructure they had planned to create a million jobs (by way of comparison: the US unemployment rose around 2.75 million between January and November of last year). Even this aim has expanded to stimulus bill ('The American Recovery and Reinvestment Act, 2009'), which passed through the American legislator and was signed into law recently. Of this bill around $80bn goes towards infrastructure, which Lawrence Summers described as the biggest investment since Dwight Eisenhower's. Regardless of the new investment placed into the US infrastructure to solve its myriad problems (from bridge collapses to inefficient roads in poor condition, to insufficient rail capacity) the era of Route 66 came to an end with its slow redundancy. In 2009 the funding for the preservation of Route 66 Corridor may end, the 1999 act authorising $10 million to preserve the properties along Route 66 only created funding for a ten year period. As a travel guide this piece won’t be useful, since 66 wanders across the Texas panhandle and through a large portion of the Mojave, there are far more appealing roads. However as a microcosm of the American experience and the impact and influence of the open road on American culture and economy it is without parallel. For more on the preservation program see: http://www.nps.gov/history/rt66/prgrm/index.htm

Tim Robinson is an Economics Student at The City University, London and the Editor of The Schumpeter.

Financial Reform - By Joao Marinho

In July 2007 the collapse of two hedge funds owned by Bear Stearns, specialised in trading collateralized debt obligations (CDOs), was a signal of the turmoil to come in the financial services industry. The market for CDOs had become illiquid and it turned out these assets were overvalued based on mark-to-market accounting. This resulted in other banks around the world having to write-down the value of similar toxic assets. As the exposures to these assets were slowly unravelled, they were found to be of very large proportions. This was possible due to the leverage undertaken by banks and the resulting swelling of their balance sheets. In 2007 RBS had a balance sheet of £1.9 trillion, larger than UK GDP. Through the subsequent months we have seen record losses by banks in the US and Europe. What has followed is the failure of many renowned institutions. Some were acquired (the most notable ones through government support), some were liquidated and others were partly or fully nationalised. Of the five largest US investment banks, three no longer exist independently and the remaining two have become deposit-taking institutions in order to call on the Federal Reserve as a lender of last resort. Both in the UK and US major banks (Citi and RBS) have become partly nationalised. Furthermore, the governments on both sides of the Atlantic have set up insurance schemes for these banks’ toxic assets. The need to restore functionality and confidence in the banking sector is undisputed; however there is much debate over the method used. There are strong arguments for alternative measures such as full nationalisation or the purchase of the toxic assets, as opposed to the insurance of these. Looking towards the future, leaders from around the world have expressed the need for reform of practises and regulation of the industry. Take for example Gordon Brown’s recent address to the US congress over the matter. This highlights the importance of a coordinated effort and the inclusion of so many countries in the discussion is a clear

sign of a shifting global balance. Both on an individual and collective level, certain key areas regarding the financial system need to be addressed: Risk management practises by banks and other institutions must be scrutinised. Current models used are clearly flawed and this is largely attributable to the time-scale they are based on. Most models only factor in the past 10 years which has been a period of relative stability. More stringent stress tests must be carried out, using a larger time-scale, and it is the responsibility of regulatory bodies, such as the FSA, to oversee these. Furthermore, once completed, the results from these stress tests should be made publicly available. Financial institutions should now focus on what was once considered their core services. We can expect to see a large reduction in more risky activities, such as proprietary trading, and a focus on advisory and traditional products by the investment banks. The exacerbated risk taking culture was strongly illustrated by AIG’s financialproducts division. One of the world’s relatively stable and largest insurance companies was brought to its knees by hedge-fund like activity from one division able to exploit a gap in the regulatory system. US Federal Reserve Chairman Ben Bernanke has recently expressed his anger at this.

One of the most concerning areas uncovered by the crisis is that of institutions that are “too large to fail”. Indeed, under current conditions, failures of companies such as RBS, AIG and Citigroup would create immeasurable shocks through both the financial services industry and the wider economy. Bank bonds represent a quarter of US investment grade corporate bonds and the potential collapse in confidence in the bond market alone would be disastrous. However, given most banks’ recent poor administration, the continued government bail-outs may create moral hazard where the upside of risk taking is large but there is a limited downside. Therefore governments and regulatory bodies must work together to establish a system where large institutions can go bankrupt without the large systemic risks. Stability in the financial services industry is of paramount importance and essential to the recovery of the real economy. We are currently going through a painful process and although the flaws and limitations of our system were exposed, the system’s ability to adapt and change is in itself its greatest strength. Changes in the coming months are expected. The financial services landscape is very different from 2 years ago and new reform will re-shape it further. Joao Marinho is a student at Queen Mary, University of London

Web 2.0 is the Future of the Corporate World - By Sammy Sung

According to Moore’s Law (1958), the numbers of transistors on a computer chip would double every year. What Moore probably did not have in mind was that the concept would evolve into something more than just technological. This year at university has proven that in more than one occasion. Lecturers are increasingly trying to emphasize the importance of knowledge management. Trying to teach students that technology has come to that point where it is not just about inventing new technology anymore, but that there are millions of ways to utilize this technology and the transformation of Web 1.0 to Web 2.0 is the full proof of this. A recent article in the Financial Times described how businesses have started applying Web 2.0 to their businesses, but managers tend to misunderstand what Web 2.0 really is. With more than 10 million hits on Google, there is still a huge argument going on about the meaning of Web 2.0. Some people use it as a marketing model, while others believe it to be an entirely new theory. The exact idea of Web 2.0 started at the Web 2.0 conference hosted by O’Reilly Media in 2004. According to Tim O’Reilly (2005), founder and CEO of O’Reilly Media, Web 2.0 does not have any hard boundaries, but rather contains a core with a set of principles and practices that demonstrate some or all of them.. Though there are already many websites that qualify as being part of Web 2.0, analysts believe it can be exploited more thoroughly. This does not have to mean that Web 2.0 is constrained with ideas that have to do with the internet alone. The possibilities of Web 2.0 are phenomenal. The rise of Web 2.0 has given innovative opportunities to potential entrepreneurs and perhaps too many brilliant ideas. The Economist wrote that venture capitalists may have wasted money by investing in too many new businesses that are focused on e-commerce this year. It is not surprising that with the success of numerous Web 2.0 applications, there will be people who also want a piece of the pie and even though many will fail exploiting this concept, it should be very much stimulated. One of the concepts that was born

GTEC 2008, Image by Mike Gifford via Wikimedia Commons

together with Web 2.0 is the Intelligent Exploiter framework that was completed only recently by two professors of CASS Business School, Clive Holtham and Nigel Courtney. This framework tries to describe the complex skills and roles involved in effectively handling information, communication and technology. What is perhaps more important is that it shows how technology can be more than just new hardware or software. It can be difficult to convince managers that knowledge management and intelligence exploiting is a long-term investment that can significantly improve the company’s position on the market. The biggest obstacle to knowledge management is to convince business leaders that the free-flow of information is not always a bad thing. Postcodes today, for example, describe more than just the location of your house. When employees at the supermarket type in your postcode, they can tell what you like to eat, how often you do your shopping, how much money you spend, etc. These are important details, it will tell the supermarket what they should focus on and how much priority they should give a particular product. It also explains to employers that perhaps they should purchase a more diverse range of products.

The whole idea of using information should of course not be limited to just postcodes. Knowledge Management is defined as the technologies that are involved in creating disseminating and utilizing knowledge data. Constantly recording information could help organisations understand customer behaviour and segment them into appropriate target groups. As businesses expand to bigger organisations, it is often the micro management that they lack. Occasionally it lies in the tiny details like knowing and sharing information about customers that can improve the company considerably and as the papers have been collectively suggesting, managers have understood this and are slowly changing. The Web 2.0 has caused business to quietly revolutionize organisations from within, but it has started to catch the attention of business leaders. According to David Bailey, of PA Consulting, Web 2.0 has already evolved into a tool that is has proven to be powerful in product development areas (2008). The concept has received positive feedback from customers as waiting time has been reduced with the use of wikis. Many organisations use social-networking sites as a tool for marketing to reach a wider audience. Record labels use YouTube to evaluate how successful a song is and how attractive an artist is to a new market. For many artists coming from East Asia, it is considered a massive challenge to enter the US market. Therefore having a powerful and attractive marketing strategy could make a difference. Utilizing websites like Youtube could then prove to be a worthy instrument on testing popularity. Executives may find that Web 2.0 is already being implemented into their organisations without them knowing it. It has proven itself to be potential, effective and powerful to the corporate world. Soon it will be necessary for businesses to implement web 2.0 as it will become impossible to work without. At the current rate, technology will begin their next step towards Web 3.0 which Jonathan Richards of The Times describes as “giving the internet itself a brain”. Intelligent exploiting will soon become crucial for organisations to keep up with customer demand and it is up to the executives utilize that and maintain their position on the market. Sammy Sung is a Business Studies Student of Cass Business School, and the current President of the Economics Society.

Why, Unlike the Rest of the Civilised World, has the United Kingdom not Adopted Metric Road Signs? 2.0 F C W - By David Osborne

The United Kingdom, just like every developed country, excluding the United States, is officially metric, so why do road signs show miles, yards and feet, although designed and manufactured in millimetres? The metric system was developed to allow for an international standard in weights and measures. This article aims to ascertain why the UK continues to be an anomalous example of a metric country by keeping its road signs imperial. It will assess the estimated costs of converting the road signs, the economic benefits of using a single system of measurement versus the economic costs of using imperial signage whilst being officially metric. It will also compare Ireland’s metric switchover in 2005 to the lack thereof of the UK. This article will also ignore the failed target to convert road signs by 1975. There are varying estimates of how much a switchover to metric signage would cost. According to the White Paper on Metrication “The most expensive operation within the field of public administration will be the conversion of all road signs showing miles (or mph) to kilometres (or kph). The cost of conversion of all road speed signs is likely to be about £2m and of all road signs indicating distance appreciably more”. (Department of Trade and Industry, 1972 paragraph 107). In today’s prices (Using the Retail Price Index) that estimate is around £21 million. Since then, the Department for Transport (DfT) and the UK Metric Association have both made estimates about the cost of converting road signs. The DfT estimated that the cost would be between £565 million and £644 million. (Department for Transport 2006) The UK Metric Association however estimated the cost of the switchover to be significantly less, approximating costs between £31 million and £160 million (Paice 2006). In the period 2006-2007, expenditure on roads was approximately £7.01 billion for England alone (Department for Transport 2008). The UKMA estimates amount to 0.49% and 2.3% of the DfT’s total expenditure on roads, whilst the estimates from the DfT amount to 8.06% and 9.19% of total expenditure. The graphs included illustrate the previous figures. There are facts about these estimates that need to be taken into consideration: • The estimates made by the DfT were made based on previous estimates in 1989. • The Estimates made by the UKMA are based on the 2005 Irish switchover. • The figure for total expenditure on roads is

Source: UKMA (2006), DfT(2006) This graph compares the estimates of the conversion costs with the total expenditure on roads in the year 2006-2007. Notice that the UKMA’s lower estimate is almost negligible compared to total expenditure.

only for England, however the estimates are for the entire Kingdom. Therefore, adding the Scottish and Welsh road expenditure would lower the percentage of expenditure for both estimates. The Republic of Ireland was in a similar situation as the UK until January 2005, when they converted their road signs to metric. Ireland’s Department of Transport (DoT) estimated that the switchover would cost € 11.5 million. In reality, the switch had a price tag of € 10.5 million (€1 million less than the estimate). (Paice 2006). In addition to the switchover costing less than expected, the conversion day went with no hiccoughs. The Republic of Ireland is much smaller than the UK in terms of population and land area, so converting road signs there is inevitably going to be cheaper than in the UK. However, the cost-effective approach taken by Ireland towards metrication of signage could be emulated by the UK. The UK’s reluctance to switch over to metric units on road signs has many implicit as well as explicit costs.

Source:UKMA (2006) & DfT (2006) This graph compares the difference in estimates, between the UK Metric Association and the Department for Transport.

An implicit cost of not going metric is the waste of the metric education, which has been taught in British schools since 1974 (Paice 2004). According to the British Weights & Measures Association, “By the time most young people reach their 20s, metric education has been replaced by the practical experience of British units”. (British Weights and Measures Association 2001). This statement is reality. Education is a benefit in kind and therefore is a burden of the taxpayer. The fact that a metric education is all but useless on British roads means that the taxpayer’s money is being wasted. A less subtle cost of using imperial signage is the fact that they have the potential to result in, especially among the European drivers. There have been countless news reports of Heavy Goods Vehicles from the Continent striking low bridges where signs are exclusively imperial, because lorry drivers from the continent do not understand imperial measures. This costs millions in repairs to bridges, railway lines, roads and Lorries each year and in extreme cases has resulted in injuries. (UK Metric Association 2008). There is no good reason why Britain has not adopted metric road signage. There is poor excuse that the British population incorrectly view the metric system as a European Union imposition on British culture. The cost of conversion is also perceived to be a deterrent to adopting metric signage, but the longer it is left, the more expensive it will become. The fact that the metric system is the official system of measurements in the every country in the world (excluding Burma, Liberia and the United States,) means that it is inevitable that Britain will have to convert road signs to metric at some point in time (As will Burma, Liberia and the US). Furthermore, the fact that the Republic of Ireland, Australia, New Zealand and Canada have recently converted their road signs to metric must infer that there are economic benefits from the switchover. By clinging on to imperial signage, the UK is doing nothing but hindering the benefits of being a metric nation. In conclusion, the UK still uses imperial road signs because there has been no thorough up-to-date research into the matter, in addition to general political ignorance. David Osborne is an Economics Student at The City University, London

The Monetarists: The Rise of Monetarism - By Timothy Robinson

“Inflation is always and everywhere a monetary phenomenon. To control inflation, you need to control the money supply” - Milton Friedman

unemployment rate. Worse, to maintain a rate of unemployment below that the of natural rate would require ever accelerating rates of inflation. This theory had pre-empted the occurrence of data supporting it.

“At last, I have discovered the cause of Christmas!” Both this narrative of the power of monetary policy from - Nicholas Kaldor (Noting that money supply increases in December and Friedman and Schwatz and the existence of a natural declines in January) rate of unemployment allowed a reassessment of the use of fiscal and monetary policy. However, this all occurred against a backdrop of high fiscal expenditure, o cover the entire history of the development of Monetarism would be too grand a scope for this article, and the rejection in practice of the monetarist precept to so it the really should be titled Friedman's Monetarism, have stable, predictable monetary policy (the k percent rule: money supply should be increased by a constant or a short history of Modern Monetarism from 1956. percent, irrespective of business cycles). Why 1956? That year Chicago Economist Milton Friedman published a series of essays, one of which he The US had a series of arguably Keynesian Presidents, wrote titled "The Quantity Theory of Money: A Restatement." Friedman set out a version of the QTM, JFK, Johnson and the "Great Society" programmes (Medicare, Medicaid, the War on Poverty), even to which in essence meant that an increase in money supply would increase spending, people would not hold Nixon's famous, oft misquoted, statement: "I am a Keynesian now in economics". (Less memorable the additional money in idle balances. Friedman saw the relation between money and prices as a uniformity perhaps than Friedman's "In one sense, we are all on the order of that found in the physical sciences. He Keynesians now; in another, nobody is any longer a Keynesian".) The US Government operating an aimed to save the QTM from the "atrophied and rigid expansionist policy, in 1968 Federal spending reached a caricature" of it; to restore the version that had been then record high of about $180 billion. (With a $25 Bn maintained in Chicago. deficit). Meanwhile the UK saw the publication in 1959 of the Radcliffe Report, rejecting the prescription of a Money Matters Two reasons for the growth of Monetarism: one stated steady growth in money supply it set the tone for by Friedman in his 1967 Presidential Inaugural Address monetary policy in the UK through the 1960s.

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to the American Economic Association (AEA): the "reevaluation of the role money played from 1929 to 1933". What Brad Delong called the emergence " from the old oral Chicago monetarist tradition of the Great Depression era". Not stated in the AEA address is the role Friedman himself played in this. His work with Anna Schwartz A Monetary History of the United States from 1867 - 1960 was an ambitious project to detail the role of money in the US over that period. This piece, so wrote the journalist David Smith, had the sense of reading a 'whodunnit'.

Political Monetarism I will end on a short description of the political influence of Monetarism throughout the 70s and 80s. Delong has argued this branch of monetarism differed from its Classical Monetarist cousin: The political form of Monetarism, Delong argued, believed velocity of money was stable; that the Central Bank could and should control money stock, and that fiscal stimulus would not boost demand, unless financed by printing money.

Finally, in 1976 Jim Callaghan told the Labour Party conference that Keynesian demand management was The second was the content of the address itself: what monetary policy can and cannot do. Friedman examined finished, and then the late 70s and early 80s saw the elections of Thatcher and Reagan and the concept of the negative relation between unemployment and Keynesian fiscal policy lost its lustre amongst the inflation, famously known as the Phillips Curve. This political class. Thatcher, who said at the Conference in relation, which held in the research of Phillips, Samuelson and Solow, began to disappear in the 1970s. 1968 that the essential role of government was managing money supply, was able to put this into Friedman outlined the theory of a long-run Phillips curve where the trade-off no longer existed; where there practice. existed a natural rate for unemployment, as such See Also: 'The Rise and Fall of Monetarism', David Smith. monetary policy had only a short term impact on the 'The Monetarist Counterrevolution', Brad Delong

Does Monetary Policy Need an Upgrade? - By Aime Sindayigaya

The current economic crisis is being discussed over various types of media. However, most of the time it is difficult to understand what solutions have been applied to solve what and why. In particular, it is hard to understand why the governments decided to bail out only the banking industry and no other. Why has the interest been cut to 1.5%? The current economics crisis is complicated until you listen to what experts say about it and read the textbooks to get detailed explanations of economic elements playing a key role in determining our fate during this uncertain time. I attended a conference that discussed the subprime turmoil and the speaker pointed out that the current economic crisis will never be resolved wholly by fiscal policy but by monetary policy. The conference was held at the time the UK government had just promised to reduce the VAT to 15%. I did not want to believe that the speaker was just against the government’s decision but I left puzzled. The reason I was confused was that the monetary policy already applied to solving the current economic crisis, had not yet given any positive result. The first banking bail out had already been granted and the UK base interest rate reduced from 3% to 1.5% and nothing had changed. More often, we are told it will take time for the effect of the bail out to show but as I write this, a second cash bail out is to be issued to the banks! I find out that the monetary policy’s functions are to control money supply, set the interest rate and ration the amount of credit. Rationing the amount of credit involves a central bank restricting banks' total lending to a certain amount, or reduce lending to riskier customers or for non essential purchase and control the level of hire purchase credit. This function was abandoned by the UK government since it prevented free competition in financial markets. Consequently, it can be concluded that the only elements of the monetary policy to determine our fate in this crisis are the money supply and the interest rate. An increase in the money supply reduces the base interest rate in the money market and as a result investments are increased. Furthermore, the increase in money supply increases real balances, providing surplus cash to consumers

who can start spending, as a result businesses activities increase and the demand for labour and capital rises. One problem with the increase in money supply is that when it is not well controlled it may lead to inflation. It would be fine if and only if our government could apply the same strategy and increase the money supply such that spending increases, without rising the rate of inflation. What does it take to increase the money supply then?

The Bank of England in Threadneedle Street, London England

One of the techniques to increase the supply of money suggested in the economics book, is the central bank to inject the money in the banks. By October 2008 the UK government had injected approximately £37 billion into the banking industry in the form of a bailout. Part of the reason such a large amount of money is only granted to the banking sector and not to any other sector, is because the banks have the capacity to expand the money supply. In fact, when banks receive extra cash from the Central Bank, they use the fund as a basis of credit creation. While this sounds simple, what are the implications of the second element of the monetary policy: interest rates? Textbooks suggest that banks’ willingness to take the extra money offered by the central bank depends on the interest rate the central bank charges. The lower the base interest rate, the more banks are willing to accept the fund. Each time money is injected into an economy, the supply of money is increased whilst the demand for money is reduced; and a new equilibrium in the money market is formed.

So you can understand the reason for reducing the base interest rate when the bail out was granted in October 2008. The reduction of the base interest rate by the central bank is not profit oriented; it is a matter of economic mechanism. Sometimes the base interest can be reduced by the monetary policy committee with the objective of increasing borrowing within an economy. In this situation the interest rate is cut and then the central bank carries out the necessary operations to adjust the money supply so that the equilibrium on the money market reflects the newly set base interest rate. This situation happened in the UK, in November, December 2008 and January 2009, the interest rate was cut to 3%, 2% and 1.5%. The reduction in the base interest rate also means that the London Interbank Offered Rate (LIBOR) used for banks when lending to each other, is presumably reduced. In normal economic times the LIBOR is set 0.1 or 0.2 above the base interest; meaning that at the moment the LIBOR should be 1.6% or 1.7%, but instead it is 2.17%. (At the time of writing) The action taken by the government to bailout the banks is justified as a way to stimulate spending in the economy through injecting money into the banking industry, with a hope that banks will pass on the fund to consumers as credit. There has not been any hesitation in the banks taking the money offered and the Bank of England cutting the base interest rate to stimulate borrowing and investment, but yet the banks are not lending. The question we may ask ourselves is why the banks are not willing to lend? One reason might be that banks want to operate on higher liquidity ratio particularly if they believe people will want to withdraw cash. This could be the situation we are in at the moment as banks fear that what happened to Northern Rock may happen to them. As a result banks have probably chosen to hold a bigger portion of liquid assets in the event of a bank run. Another possible reason is that banks do not want to be declared insolvent and end up like Lehman Brothers; as a result banks must ensure an adequate and guaranteed level of assets is maintained against their liabilities by increasing their deposits and not lending. Many British banks have written off credit generated from the subprime lending, hence their balance sheets have been heavily affected. Therefore, the extra fund received from the Bank of England may not be used for credit creation but to fill in the gap in the banks’ balance sheet created by the losses generated from the subprime business. In my

view, banks are concerned with the health of their balance sheet; that is why banks are very cautious of who they lend to. Even lending between banks themselves is difficult as the LIBOR is above the normal estimated market level. In fact one of the solutions being studied at the moment by governments worldwide is to buying all toxic assets from banks. There is a hope that this action will adjust the banks’ balance sheet and prompt them to resume lending. In conclusion, it is hard to convince people that normal monetary policy will sort out the current economic crisis. There is a need for the banks, governments and economists to cooperate on a global basis and design a strong monetary policy framework which can handle extreme situations, and is still suitable for our modern, innovative financial sector. Aime Sindayigaya is a Postgraduate Student at The City University, London.

St. Thomas Aquinas: was he an economist of our time? - By David Osborne

Usury, which is condemned in the Bible, Torah and Koran, may be as far as many minds go when it comes to connecting religion and economic principles. However religious figures have had much more influence on the economic principles of our day than we may wish to believe. A notable figure in this respect is St. Thomas Aquinas, who was an Italian Dominican priest. We’re familiar with Adam Smith’s works on the division of labour, but did the principle of division of labour really begin with Smith? In “Summa Theologica II”, (published five hundred years before Smith’s) “The Wealth of Nations,” Aquinas states: “One man does not suffice to perform all those acts demanded by society, and therefore it is necessary that different persons be occupied in different pursuits.” This view is one built upon Smith, in order to form his view on the subject. It highlights the similarities between economic thinkers throughout time. However, Aquinas’ “economic” perspectives were not all in tandem with those of famous economists such as Smith. For example; Government Intervention, where Smith argued that each person acting in selfish greed benefits the economy on a whole, therefore government intervention was absolutely unnecessary. Aquinas’s view differed considerably. He believed that government had a duty to regulate the economy, but only within reason. In the wake of the Credit Crunch, we can see the effects of both types of economy. The “selfish” Economy as according to Smith, has taken a severe beating, and governments are beginning to use the theory of regulation brought forward by St. Thomas Aquinas. 1

Carlo Crivelli's depiction of St. Thomas Aquinas from the Demidoff Altarpiece c. 1476 David Osborne is an Economics Student at The City University, London. Notes: 1

Thomas Aquinas: A Pioneer in the Field of Law & Economics, Robert W. McGee, Barry University Published in Western State University Law Review, Volume 18, No. 1 (Fall, 1990), 471-483. 2 St. Thomas Aquinas, Quaestiones quodlibetales vii. 17; cf. Summa Contra Gentiles iii 132; Contra Impugnantes Dei Cultum et Religionem v. 27, as quoted in Dino Bigongiari, The Political Ideas of St. Thomas Aquinas ix (1953).

News Summary

Quotes

Patrick Minford speaks at the University The former adviser to the Treasury Sir Patrick Minford, Professor of Economics at Cardiff University, spoke on the Causes or and the Response to the Credit Crisis in a talk titled "Looking up while going down: The Causes and Consequences of the Current Economic Crisis"

" If the issue was to stabilize the financial system and prevent a collapse, and get by the point where the market is rattled wondering which big institution will go down next, I think on a scale of one to 10 we are very close to 10."

The Schumpeter Online The Schumpeter is now online at theschumpeter.blogspot.com The Economics Society has also launched a Facebook group to provide immediate updates on events to members. Join us at: www.facebook.com/group.php?gid=31445513286

Hearsay and Anecdotes

Thinking Inside the Box The Bentham Project launches a blog. The famous 18th Century economist Jeremy Bentham has been reborn courtesy of a new blog from the Bentham Project. Jeremy Bentham will offer his thoughts through the website hosted by the Nature Network London. Look for an introduction to the new fortnightly blog at: www.ucl.ac.uk/Bentham-Project/info/blog.htm

"Pay what you want" London Restaurant runs Freakonomics scheme

The Little Bay restaurant in London ran a scheme offering patrons the chance to decide how much the meal is worth. The owner, Peter Ilic, provided customers with no cheque giving them the opportunity to decide whether to pay between a "penny and 50 pounds". Pictures of the Recession Slate Magazine looks for the iconic images of this recession to go alongside the breadlines and wagons of the Great Depression. www.slate.com/id/2211959/

- Henry Paulson, Former US Treasury Secretary. (In a comment to the WSJ CEO Council on the 17th of November 2008. On the 23rd of November Citigroup was given a $20 billion direct investment and the government backed $306 billion in loans and securities.) "[T]he objective ought to be increased protection against systemic risk, and increased protection for consumers...So it seems to me that you have to find the optimum balance between increasing protections against risk and maintaining the benefits of market-based systems, as opposed to the objective of minimizing or even eliminating risk" - Robert Rubin, Former US Treasury Secretary, at the same event. "Beneath the surface of overall stability in the UK economy lies a remarkable imbalance between a buoyant consumer and housing sector, on the one hand, and weak external demand, on the other... a large negative demand shock might result in an undershoot of the inflation target for some considerable time." - Mervyn King, Governor of the Bank of England, in a speech given to the London School of Economics in November 2002. "The SEC continues to roar like a mouse, and bite like a flea...I gift wrapped and delivered the largest Ponzi scheme in history to [the SEC], and somehow they couldn't be bothered to conduct a thorough and proper investigation...[The SEC is] both a captive regulator and a failed regulator" - Harry Marcopolis, a Private Fraud Investigator who wrote a report to the SEC titled: "The World's Largest Hedge Fund is a Fraud", in his testimony to Congress in the Madoff Hearing.

Any Comments/Contributions, contact: [email protected] or [email protected] Cover Pictures by: Hay Kranen, David Shankbone, Ivo Shandor, from Wikimedia Commons.