Monthly Archives: September 2011

According to a FT article last week, Lloyds’ bank has a target return on equity of 14.5 per cent. Banks like to argue that this is the level of return on equity they need to earn, in order to gain funding from the markets. Naturally, remuneration is linked to achieving such objectives. The question, however, is whether such objectives make any sense. The brief answer is: no.

Forget banks, for the moment. What would you say if someone offered you an investment with a promised real return of close to 15 per cent? You might say: “How much can I buy?” Alternatively, you might say: “What is the catch?” Sensible people must take the latter view. If you thought that you were being offered a reliable real return at such an exalted level, you would buy as much as you could. This must be particularly true now when real returns on the bonds of relatively safe governments are close to zero.

So what is the catch? The obvious answer has to be that the real return in question is extremely risky, because it is volatile and offers a significant chance of total wipe-out. Read more

Anniversaries are a time to take stock, to ask where we have been and where we might be going. 2011 offers three remarkable anniversaries: the economic reform of India and the fall of the Soviet Union, both in 1991; and the terrorist attack on the US on 9/11/2001. What should we think about these three events, today? Here are a few tentative answers.

Is it too soon to tell? Yes. It always is. Each generation changes its view of the past in light of the present. That will continue, if not forever, at least indefinitely. We might well disagree about the significance of events that took place centuries ago. It is far too early to tell what these events might mean. Today, for example, 9/11 looks far less significant than it did at the time. One significant act of nuclear terrorism would transform that judgement.

Which of these events might posterity view as the most important? My guess is that it will be the economic reforms in India. The decision of the Indian government, under prime minister P. V. Narasimha Rao and his then finance minister Manmohan Singh (the present prime minister of India) to launch fundamental economic reforms on July 24 1991, in response to a severe balance of payments crisis, was a world-transforming event, in at least five respects. Read more

The Wolf Exchange will now restart. During the year I spent working on the UK government’s Independent Commission on Banking, whose report will appear on Monday 12th September, I could not continue with this venture. I hope to do so now.

My plan is to produce a substantial piece every two weeks, starting now. I hope also to write shorter pieces in between. The topics will be mostly, but not exclusively, about economics. I expect to respond relatively briefly to comments before the next big post. But I will not respond as actively as I did before. That way, I have discovered, madness lies. I will not respond at all to abusive, irrelevant or foolish comments. I will try to respond to comments that are courteous, relevant and thoughtful.