Tuesday, October 27, 2015

Father of Finance

The University of Chicago is simply an amazing place.  Its economics department has spawned an astonishing 28 Nobel Prize winners.  So far this year, I have been able to hear presentations by four of them.  Last week was a special treat.  I was able to attend a Q & A presentation by Eugene Fama, 2013 winner of the Nobel Prize.   Known as the "Father of Modern Finance," Fama's work has been integral to modern portfolio theory and asset prices.  Fama's research is was the underpinning of the development of index funds.  He is churlish and a bit laconic but attending a presentation by Fama was like going to the oracle, especially since I missed his class when I was in business school (to be more precise, I ducked it as his reputation as a brutal teacher intimidated me).  He was known as someone that could bring math majors from top notch schools to their knees.

Here is a summary of Fama's quotes by topic:

"Too big to fail doctrine" -- an abomination.  Since the Continental Bank bailout, it has taken on a life of its own.  Banks now have a put option on us.   It makes their debt riskless.  Banks kick and scream like crazy if they are required to maintain more equity.

"Dodd-Frank" -- supposedly did away with To Big To Fail and prescribed and orderly wind down of large institutions.  Except that the Treasury Secretary has to approve it.  Good luck on that one.  No Secretary of the Treasury will approve such a wind down.

China --  Chinese data are basically junk.  We can't even produce good data.  We simply do not know how they are doing.  All signs point to a significant slowdown.  I don't know if it [the slowdown] is such a big deal for us.  The real question is when will a blowup happen? If you give people capitalism, they will want freedom.

Interest rates and the economy-  We need a much stronger economy to raise rates.  The economy is not strong.  New business formation is in the tank--- off 30% from the norm.  We have had eight years of regulation and more regulation.  Now firms need a big compliance group. Technology has been relatively unregulated and more students are finding employment there, but now government wants to regulate the internet.

Performance of other asset classes--  There is no real good data on real estate. With private equity, data is skewed.  Only the ones that have done well want to giver you data.

Behavioral economics-- Behavior is what economics is all about.  Does it mean that it is irrational behavior?  You need to show me a way to document it in behavior.  It's very expensive to collect data.  

On Richard Thaler-- If he would give me things in testable form, I would collaborate with him.  I always challenge him, "Do you want to document that?"

On Big Data--I don't know what the fuss is.  I've been doing Big Data all along.

On where his research is going--If I knew where it was going to go, I would have gone there already.

It is one of my great regrets that I did not take his course.  I would have had to work like a dog and stress and strain to get a "C" but it would have been a C I would wear like a badge of honor.


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