Famous Folks - Alan Greenspan

#18

Who?

• American economist
• Chairman of the Federal Reserve from 1987 to 2006

Career and Personality

• Came to the Federal Reserve Board from a consulting career
• Subdued in public appearances, but media and followers considered him a rockstar
• Criticized by Democratic leaders of Congress for increasing the deficit via his support for Social Security privatization and tax cuts
• Called 'inflation hawk' because of his inflation policy, wherein critics claimed he was focusing on controlling prices rather than achieving full employment
• Blamed in part for both the 2000 dot-com bubble and 2008 financial crisis
• Known for being adept at gaining consensus among Fed board members on policy issues and for serving during one of the most severe economic crises of the late 20th century, the stock market crash of 1987

Views and Contributions

• Greenspan was found by the Financial Crisis Inquiry Commission to have contributed to the 2008 financial crisis for his failure to curtail subprime mortgage loans during the housing bubble
• In a 2004 speech, he suggested that more homeowners should consider taking out adjustable-rate mortgages (ARMs) where the interest rate adjusts itself to prevailing market interest rates
• He argued that the housing bubble was not a product of short term low-interest rates but rather a worldwide phenomenon caused by the progressive decline in long-term interest rates
• When interest rates rose, it reset people's mortgages to higher payments causing even more distress for homeowners, exacerbating the impact of the crisis
• He advocated for slashing interest rates after the 1987 stock market crash to prevent the economy from sinking into a depression
• After the 9-11 World Trade Center attack, Greenspan led the FOMC to reduce the Fed funds rate from 3.5% to 3% and subsequently to 1%; despite this, the economy remained sluggish
• The easy-money policies of the Fed during his tenure such as the Greenspan put have been suggested to be a leading cause of the dot-com bubble
• He used the phrase "irrational exuberance" to imply a warning that the stock market might be overvalued

Objectivism

• Greenspan met novelist and philosopher Ayn Rand in the early 1950s, who nicknamed him "the undertaker" because of his penchant for dark clothing and reserved demeanor 
• He was initially a logical positivist before he converted to Rand's philosophy of Objectivism by her associate Nathaniel Branden
• During the 1950s and 1960ss Greenspan was a proponent of Objectivism and wrote essays and articles for Rand's 1966 book Capitalism: The Unknown Ideal

The 'Greenspan Put'

• Trading strategy popular during the 1990s and 2000s
• Greenspan attempted to help the U.S. economy by actively using the federal funds rate as a lever for change
• This encouraged excessive risk-taking leading to put options being lucrative
• The 'Put' referred to a reliance on a stock market put option strategy that would aid investors in mitigating their losses, thus profiting from deflating market bubbles
• It suggested that informed investors could expect the Fed to act predictably and make put option derivative strategies profitable during crises

Fun Facts

• Greenspan’s interest in facts and figures began at age 5 when he took a liking to recite baseball batting averages of players, which helped him figure out calculations in his head
• Studied music at Juilliard and toured the country playing tenor sax and clarinet with The Henry Jerome Orchestra
• Served under four presidents, starting with Ronald Reagan and ending with George W. Bush
• Describes himself as a "lifelong libertarian Republican"

Timeline of events

• Stepped down as Federal Reserve chairman in 2006
• Global financial markets began to unravel
• Few financial institutions collapsed while governments experienced massive bailouts 
• The worst economic downturn in three-quarters of a century ensued
• Lots of people blamed Greenspan for some or all of this
• He claimed to have found a flaw, so to speak, in how the world works, in a Congressional hearing in October 2008

Awards and Honours

• U.S. Senator John Heinz Award, 1976 (Greatest Public Service by an Appointed Official)
• Fellow of the American Statistical Association, 1989
• Commander of the Legion of Honour in France, 2000
• Order of the British Empire (Civil), 2002
• Dwight D. Eisenhower Medal for Leadership and Service, 2004
• First recipient of the Harry S. Truman Medal for Economic Policy, 2005
• Presidential Medal of Freedom, 2005 (Highest US civilian award)
• Thomas Jefferson Foundation Medal in Citizen Leadership, 2007

Quotes

"It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously."

"I know you think you understand what you thought I said but I'm not sure you realize that what you heard is not what I meant."

"Government regulation cannot substitute for individual integrity."

"Unless you are willing to compromise, society cannot live together."

"I have found no greater satisfaction than achieving success through honest dealing and strict adherence to the view that, for you to gain, those you deal with should gain as well."

"Anything that we can do to raise personal savings is very much in the interest of this country."

"The true measure of a career is to be able to be content, even proud, that you succeeded through your own endeavors without leaving a trail of casualties in your wake."

"I'm not denying that monopolies are terrible things, but I am denying that it is readily easy to resolve them through legislation of that nature."

"The very nature of finance is that it cannot be profitable unless it is significantly leveraged... and as long as there is debt, there can be failure and contagion."

"History has not dealt kindly with the aftermath of protracted periods of low-risk premiums."

"Revolutions are something you see only in retrospect."

Notes

Harsh criticism of his tenure at Fed Reserve:

Some of Greenspan’s harshest critics point to his earlier association with famed philosopher and novelist Ayn Rand. The essay he wrote for Rand, which also appeared in her book attacked the Federal Reserve and supported the gold standard to back the money.

Former Congressman Ron Paul of Texas once confronted Greenspan about his turn away from Rand’s ideas of free-market economics and the gold standard, but Greenspan stood firm with his change of views on economics.

Although Greenspan saw the nation go through tremendous economic growth through the 1980s and 1990s, his last five years as Fed chairman witnessed a 13% plunge in the S&P 500.

Greenspan featured as one of the "25 People to Blame for the Financial Crisis" Time magazine article, which also suggested that Greenspan's advocation of low-interest rates combined with the unregulated financial system may have sparked the mortgage and banking crisis.

Famous Folks - Raghuram Rajan (RR)

#12

Who?

• Chief Economist at the International Monetary Fund (IMF) from 2003-2006
• RBI Governor from 2013-2016
• ‘James Bond’ of the Indian economy
• Finance Professor at the University of Chicago Booth School of Business

Tidbits from his personal life:

• RR was born in Bhopal into a Tamil family
• He was appointed as Chief Economic Adviser to India's Ministry of Finance for a year before he served as the RBI Governor
• RR is an active crusader of the free market system
• Due to his interest in math, he read Asimov's Foundation series after his friend told him about econometrics
• His other inspiration is John Maynard Keynes, whose work he finds extraordinary
• RR is an avid quizzer and enjoys reading the works of Tolkien, Tolstoy, and Upamanyu Chatterjee
• RR was extensively interviewed for the award-winning documentary Inside Job
• He suggests that capitalism serves as a handy tool to abate poverty and provides equal opportunity for all
• He believes that there is nothing more motivating than the drive to deliver better

What he did as the Governor of RBI:

1. UPI (Unified Payments Interface) was launched to reduce the cost and time taken to make simple payments for transactions up to Rs. 1,00,000. It avoids the long-winded payment transfer procedure. All one requires is a UID (unique ID) and a mobile pin to authenticate the payment.
2. Payment Banks would accept only deposits and not be involved in lending. This initiative was aimed at providing banking facilities to those deprived of them. The RBI licensed 2 universal banks and approved 11 payments banks for providing banking services.
3. RR successfully managed to curb the retail inflation from 9.8% (September 2013) to 3.78% (July 2015), and Wholesale inflation from 6.1% (September 2013) to a historic low of -4.05% (July 2015).
4. When RR joined office, the currency was at Rs. 70 against the US Dollar. During his tenure, he successfully managed to pull up the rupee.
5. On his very first day as the Governor of RBI, he spoke about a new approach to formulating monetary policy, and in the same month also picked Deputy Governor Urjit Patel to examine the monetary policy framework, which stated the objective of maintaining inflation under 6 per cent.
6. RR initiated a total restructuring of the RBI from the inside. He organized the RBI central office departments into five groups namely, Regulation and Banking Services, Operations and HR, Supervision and Risk Management, Financial Markets and Infrastructure, and Monetary Stability.
7. Indian banks hold more than $110 billion of corporate stressed debt, which result in preventing fresh loans to be given, dampening a quicker economic recovery. RR focused his efforts on cleaning up the banks' balance sheets and put pending projects back on track.

Fun fact:

RR was in the running for an Economics Nobel Prize for the following reasons:

• RR, at 40, became the youngest ever Chief Economist of the IMF.
• He predicted the financial crisis of 2008 three years before the economic meltdown actually happened. He was greeted with laughter and disbelief when he highlighted unsustainable banking practices and risky financial instruments such as mortgage-backed securities and credit default swaps that could lead to economic collapse.
• RR's book Fault Lines garnered global attention to income inequality, where he warns against the reforms not addressing the stagnating middle-class earnings, which in turn played a role in the 2008 meltdown.
• His subtle handling of the rupee crisis in 2013 that helped bring back foreign investors to India. He made handing out new bank licences transparent and controversy-free, and also fought against inflation by targeting CPI (consumer price inflation) rather than WPI (wholesale price inflation), the index traditionally targeted by the RBI.

View on demonetization:

• In 2014, RR stated in a speech that demonetization was not an effective enough measure to curb black money, because to him, “clever people find ways around it.”
• In 2017, RR mentioned that the RBI was against demonetization and warned the Indian Government about its negative impact.
• RR wondered if currency notes ban would result in economic success or not.
• Some people speculate that this conflict regarding a difference of opinions in terms of the demonetization policy was the reason for his exit from the RBI Governor’s office.

A few of the awards he's won:

• Fischer Black Prize in 2003
• Awarded by the American Finance Association
• For contributions to the theory and practice of finance by an economist under the age of 40
• Financial Times and McKinsey Business Book of the Year Award in 2010
• Fault Lines: How Hidden Fractures Still Threaten the World Economy
• Deutsche Bank Prize in Financial Economics in 2013
• For his ground-breaking research, which influenced financial and macroeconomic policies globally
• Governor of the Year Award from London-based financial journal Central Banking in 2014
• Yashwantrao Chavan National Award in 2019
• For his contribution to economic development

One of his books which I'd like to read, which explores the causes of the 2008 financial crisis:

Fault Lines: How Hidden Fractures Still Threaten the World Economy

Some of my favourite RR Quotes:

"Strong government doesn't mean simply military power or an efficient intelligence apparatus. Instead, it should mean effective, fair administration - in other words, 'good governance.'"

"Central bankers have had enormous responsibilities thrust on them to compensate, essentially, for the failings of the political system. And my worry is we don't have sufficient tools to do that, but we're not willing to say it."

"How do we get more politicians to move from 'fixing' the system to reforming the system? The obvious answer is to either improve the quality of public services or reduce the public's dependence on them. Both approaches are necessary."

"Everyone may have some advice for the RBI. Some may advise, 'Cut your lending rates and raise the deposit rate.' How will a bank function? We take a medium-term view. The bank has an 80-year-old history. I don't want to destroy it for a few decisions."

"We should make sure that unscrupulous schools do not prey on uninformed students, leaving them with high debt and useless degrees."

"Perhaps the hardest challenge has been to persuade the public, impatient for rapid growth, of the need to ensure stability first. Growth, it is argued, is always more important, regardless of the looming economic risks."

"Democratic accountability means that governments must be popularly accepted, with citizens empowered to replace corrupt or incompetent rulers."

"If economists were to wait for careful studies before offering opinions about policy, we would never have anything timely to say."

"It is not because of the benevolence of the baker that we eat fresh bread in the morning but because of his desire to make money."

Scandalous - Charles Ponzi

#8

What?

Origin of the Ponzi Scheme

Who?

Charles Ponzi (1882–1949) - an Italian immigrant living in Boston.

When?

It happened in 1919.

Crime in one line

Ponzi conned investors into giving him millions of dollars and paid them returns with other investors’ money.

What did he do?

He came up with a scheme to get rich by purchasing international reply coupons (IRC) for a low price abroad and then selling them for profit in the US.

What’s a reply coupon?

It’s a coupon that can be exchanged for several priority airmail postage stamps from another country.

What was the problem?

Though Ponzi was able to repay his investors their money, via subsequent investors, he had not yet figured out a way to actually convert the IRCs to cash. He then realized that changing the coupons to money was logistically impossible.

What this led to

The ‘Ponzi scheme’

In short:  “robbing Peter to pay Paul”

Damages and Impact

In order to cover the investments made with the Securities Exchange Company, 160 million postal reply coupons would have to be in circulation. However, only about 27,000 were in circulation.

In August 1920, Ponzi was declared hopelessly insolvent, reporting at least $2 million in debt. It was later found that he was actually $7 million in debt.

Magnitude of losses

Ponzi’s investors were essentially wiped out, receiving less than 30 cents to the dollar. They lost about $20 million in 1920 dollars (approximately $196 million in 2019 dollars). By comparison, Bernard Madoff’s similar scheme that collapsed in 2008 cost his investors about $18 billion, 53 times the losses of Ponzi’s scheme.

Typical Characteristics of a Ponzi Scheme

Scheme:

• Guarantee of high returns with low risk
• Consistent flow of returns regardless of market conditions

Investment:

• Unregistered investments with the Securities and Exchange Commission (SEC)
• Investment strategies described as too complex to describe

Customers:

• Clients unallowed to view official paperwork for their investments
• Clients facing difficulties removing their money

Stay tuned

We’ll later look at some of the Ponzi scheme scandals that took place more recently, like Bernie Madoff, whose name this scheme is synonymous with, and also the Ponzi scheme employed by Sahara’s Subrata Roy to dupe thousands of poor investors.

Related

Pyramid scheme

Introduction

#1

Welcome to a world of Money, Money, Money!

This blog contains posts on various topics related to finance, such as the following:

1. Accounting basics
2. Derivatives
3. Econometrics
4. Economics basics
5. Good books to explore
6. Famous folks in finance
7. Miscellaneous concepts
8. Scandals
9. Security analysis
10. Valuation

In this blog, I do not plan to talk about theories and concepts in a verbose manner.

What I'd rather attempt is to achieve a fun-filled way to approach the world of finance, a 'finance made easy' concept, if you will.

If you find the topics and the approach I've chosen interesting, you might retain some of them for a long time, and that's all I hope for.

If you do wish to read further on some of the topics, Investopedia is a great site, to begin with.

Cheers!