Personal finance is hard….

I’ve got pages and pages of notes from TCFA ’2006, and I’m going to be posting them on my blog over the next few weeks. It will be stream of consciousness, and it won’t be in chronological order. Just whatever I’m interested in.

One of the interesting talks was by Professor Robert Ibbotson, who made a very interesting point in that he pointed out that it is tougher to manage personal finances than it is to manage a huge billion dollar portfolio for an institution. Invididuals have to worry about a very, very complex tax code whereas institutions don’t have to worry the tax consequences of their investments. Individuals have to have most of their investments in liquid investments, whereas institutions don’t have to do this. Individuals take whatever products are available whereas institutions can have financial products custom built for them. Individuals pay a huge amount in transaction fees, whereas transaction fees are a minor part of an institutional investment. Individuals don’t have the ability to get much advice and a lot of the advice has conflict of interest issues whereas institutions can hire specialists to manage their investments.

The net result is that the average person has a much harder problem managing their finances than a institutional fund manager has in managing theirs. (And institutions do more or less what individuals do, which is to to look up and invest in what are basically mutual funds.)

The other interest point is that for an individuals, *returns don’t matter*. The difference between returns is insignificant compared to transaction fees and taxes, and those need to be the main concerns for an individual.

I love this business

A comment on Brad Setsers blog….

I’m starting to dislike the word “liberalization” since it is becoming one of those vague feel good words whose meaning is fuzzy. When someone talks about financial system liberalization, what do they mean? End of capital controls? Floating currency? Remove restrictions on foreign ownership? Market based interest rates? What?

Also, I just finish a conference at MIT by the Chinese Financial Association and I’m about to head to NYC for another conference on Chinese banking by the Asia Society. I think that there is a consensus among most people (including people in China) that China needs to appreciate the RMB. The question right now is timing, pace, and sequence. Does floating the currency go before or after relaxing capital controls, for example?

Paulson (unless he is radically different from everyone else in finance I’ve talked to) is *not* happy about global imbalances. It worries anyone who has thought of it.

About Democrats, Wall Street is more partial to Democrats than one might otherwise expect. There are a lot of “Rubin Democrats” on Wall Street, and my general impression is that the campaign contributions people make are because they really believe in the policies rather than for tactical reasons.

The other thing is that is refreshing about Wall Street is that people are much more “big picture” than most people I’ve met elsewhere (including frighteningly, Washington DC). Part of it may have to do with the fact that a lot of them are pension fund managers that have to think 25 to 50 years ahead.

Goldman-Sachs *does not care* whether the Chinese government increases the limit on bank investment in the next year or two. It’s looking 25 to 50 years ahead.

Long term greed. It’s quite refreshing.

TCFA 2006

Posting this from Hayden Library at MIT.  I just finished TCFA 2006 a few hours ago, and I have got huge amounts of notes that I need to transcribe to the blog.  Tomorrow is FEA 2006, but I think that I’m going to skip day one and just attend day two and the banquet.  Conferences are amazingly exhausting, and I need to do some sightseeing while I’m at MIT.

I learned a whole bunch, but the main thing that I learned was that I’m not doomed….

There was always the nagging feeling that if I didn’t do the right things that I would be doomed in finance.  This fear was reinforced by the fact that my first contact with finance was through headhunters, and they strictly control the information that they give you about what it is like in finance, and also suggest that if you don’t take the job you are doomed.  The fear that this is your one and only chance is a powerful emotion, but fortunately the main thing that I learned is that everything is probably going to work out alright for me.  The main thing is that I’ve talked to enough people that I now see myself as on the “inside” of the finance community rather than on the “outside.”

Comments on Louis Kuijs and Tao Wang

http://ideas.repec.org/p/wbk/wbrwps/3767.html

I like papers like these because they have lots of data, and once you have lots of data, you can disagree about what the data means.

The main problem I see with the paper is that it fails to connect the GDP sector numbers with changes in the Chinese economy from 1993-2004.  During the late 1990′s, bankrupt Chinese SOE’s were rapidly closing and shedding tens of urban millions of workers, and the Chinese economy was struggling to employ those workers so there wasn’t any increase in employment.

Kuijs mentions some issues with data quality and talks about the how the floating population and the underestimate in services doesn’t really affect his main conclusions.  There is one more factor that should be considered.  Between 1990 and 1998, China dismantled the last remnants of central planning and moved to a market oriented pricing system.  One persistent problem with centrally planned systems is that they tend to wildly underestimate the price of inputs and wildly overestimate the value of outputs.  Once you move to more rational prices, this causes an apparent increase in capital intensity, but that just reveals the hidden capital intensity of the system under state planning.

Then again maybe not.  The nice thing about papers with lots of data is that you can take these as hypothesis and examine how it influences the data, which is what I’ll be doing in the next week.

Martin Wolf and China’s piggybank

I agree with Martin Wolf that one thing that should be done is that now the state-owned enterprises are profitable, that the Chinese state should use some of these profits.  There is no shortage of things that the Chinese state can usefully spend these profits on, including boosting education, health spending, environmental cleanup, funding old age pensions etc. etc.  There is also a multiplier effect in that once the government spends money on healthcare and education, this reduces the need for households to save and this releases more capital into the economy.

The problem is that having SOE’s issue dividends needs to be done carefully and according to some policy.  The classic problem with SOE’s is that the state takes out too much money in order to pay for government spending of questionable usefulness.  This makes it difficult for SOE’s to invest in capital improvements or pay its own workers decent wages, and this makes the SOE more inefficient which causes a downward spiral.  Also what is the point of making a profit, if the state just comes and takes it away, and what happens when the economy changes and the SOE isn’t making a profit?

It’s for these reasons that the PRC established very early on the principle that the government would only take money from the SOE’s in the form of taxes and only provide money to the SOE’s in the form of loans.  This policy has outlived its usefulness, but we have to think very carefully about what the new policy should be.

Personally, my feeling is that diversifying the ownership of SOE’s would help a lot.  If you have an SOE whose shareholders consist of twenty different owners with a mix of both public and private owners, you are likely to make better decisions about dividend distribution than if you have one big owner.

An overheard conversation about wikipedia

This is an e-mail message that I wrote in response to something that happened…..

I’m actually not surprised at all that we are getting little cooperation from the big internet content providers in the PRC, since they don’t have any reason to take on risks that would threaten their income.  Part of the effectiveness of PRC internet censorship involves concentrating internet distribution into a small number of large companies who are then rather easy to control since they rely on official permission to function.  There is no reason why any large company would risk their profits for us.

I would suggest a two prong approach to bypassing the firewall

1) find ways of having lots of wikis in Mainland China.  The purpose of this is to make it so that people know that wikis exist.  These wikis don’t have to have anything to to with wikipedia.

2) make it relatively easy for people who are interested to connect to wikipedia.  Once people know that wikis exist, and have heard of the blocked wikipedia, this gets people interested.

For 1), I’ve been thinking about ways of having excuses for setting up wikis in Mainland China.  Something that might be useful is to have a moderated version of mediawiki which serves merely as a convenient way of updating your home page.  You can have people post imbeded comments and then moderate them, and just make encourage people to use it for classes or for their home pages, or anything at all.

Also, technically a university or corporation that uses the internet for their own business purposes is not an internet content provider, and isn’t technically subject to the rules.  So if we can find some professor that wants to set up a semi-public moderated wiki for their class or for their home page that would be useful, and if a professor happens to cut and paste wikipedia content on their wiki, there aren’t any regulations against that….

In large companies, if you ask permission to do something different, the answer will always be NO!!!!!  People in large bureaucracies get their power from saying NO!!! and not by saying YES!!!!

What you have to do is to not do anything different.  If the people in power don’t like wikipedia, then we aren’t doing wikipedia, we are just doing an unaffilated encyclopedia with wikis.  If they don’t like an unaffliated encyclopedia with wikis, then we aren’t doing an encyclopedia, we are just doing courseware.  If they don’t like wikis, fine, we aren’t doing a wiki, we are just doing a blog with embedded comments, and they already said we can do blogs.

The overall concept is that you bypass a wall by acting like water.  If find whatever tiny crack in the wall you have an excuse to use.

One thing I try to tell myself is not to get too emotional about any of this.  What we are doing is a small part of a story that will last decades.