This week’s reading

Below are links to an article, pod cast and blog post we found interesting this week.

In his article Banking Needs More Robust Stress Tests Than These, John Kay writes in the Financial Times about the inadequacy of the European Bank stress tests.  He argues that while the language of “stress tests” is borrowed from engineering, the standards being applied are nowhere near as rigorous as those demanded in engineering.  As many banks learned first hand in 2008,  “industry-standard” stress assumptions can create complacency.  Wimpy standards blessed by primary regulators may be worse.

One of our favorite weekly radio programs/podcasts is This American Life.  The show does not generally cover finance, but does a remarkable job whenever it gets around to covering the topic.  For example, they present a very good explanation of the financial crisis in an episode titled The Giant Pool of Money.  In a recent episode, the team took a look at US state budget deficits through the unique mix of political dysfunction, profligacy and entrenched distrust that characterizes the politics of Albany.  The episode also contained a cautionary tale for states and countries with polarized political landscapes.  In what comes as close to a controlled experiment in economics as one gets, we have the tale of Barbados and Jamaica.  Both countries confronted a ruinous economic landscape in the late 70s.  The nature of their local politics and the level of social cohesion led to small difference in the way they tackled their crises, but these small differences appear to have had an out-sized impact on future growth.   The episode is titled Social Contract, and is worth listening to in its entirety.

and apropos of nothing in particular, we quote The Epicurean Dealmaker:

There are those who style themselves intellectuals—a notably large portion of whom, in my personal experience, happen to be economists—who are deeply suspicious of anecdotal data in general and anecdotes about finance, economics, and the behavior of market participants in particular. This has always struck me as revealing both a superficially shallow skepticism about the primary sense and experience data of others—which, after all, is the most reliable data each of us individually possesses—and a similarly unwarranted credulity about its opposite, broad and impersonal third party datasets.

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Oh, and by the way, while quality has certainly improved since I started in investment banking 20 years ago, it remains true, for example, that the banker who wishes to remain employed will always check the accuracy of third party data against original sources before he incorporates it into his own work product. So much for the reliability of external datasets when real money—as opposed to, let’s say, a research grant—is on the line. Oh snap.

— TED, unpublished remarks