Bernanke On Implementing Monetary Policy

Brad Delong give us this link to Ben Bernanke talking about how monetary policy is actually conducted:

FRB: Speech, Bernanke--Implementing Monetary Policy--March 30, 2005: at the Redefining Investment Strategy Education Symposium, Dayton, Ohio March 30, 2005

Among the most important of my duties at the Federal Reserve is serving on the Federal Open Market Committee (FOMC), the body that makes U.S. monetary policy. Nineteen men and women--the seven members of the Board of Governors and the Presidents of the twelve Reserve Banks--gather in Washington eight times each year to participate in FOMC deliberations on the course of monetary policy. If necessary, the FOMC can also convene by conference call between regularly scheduled meetings. The FOMC's decisions are guided by the dual mandate given to the Federal Reserve by the Congress, which enjoins the Committee to use its powers to pursue both price stability and maximum sustainable employment.

Click here for the whole article.

This article is a must read for anyone that's even vaguely interested in the economy as a whole and/or the role of central bankers. I'll definitely give it to my next Markets and Institutions class.

The Feynman-Tufte Principle (From The new Economist)

Richard Feynman was a fascinating figure - Nobel prize winning physicist, member of the Manhattan Project, drummer in a Brazilian street band, and amateur safe-cracker in his spare time. To many finance professors and practitioners, he's also known for developing a solution to a 3rd order partial differential equation that Black and Scholes used to solve the option pricing problem. He was particulary admired for his way of illustrating phsics concepts through what are now known as "Feynman Diagrams". The New Economist.

Edward Tufte is also know for his work on the visual display of information. It turns out that he also was a fan of Feynman. The New Eonomist writes:

Many economists would - or certainly should - be familiar with the pathbreaking work of Edward Tufte on the visual display of information. hence my interest in a short piece by Michael Shermer in the April 2005 issue of Scientific American on the Feynman-Tufte Principle (permanent version here). It's short, but insightful:

Tufte codified the design process into six principles: "(1) documenting the sources and characteristics of the data, (2) insistently enforcing appropriate comparisons, (3) demonstrating mechanisms of cause and effect, (4) expressing those mechanisms quantitatively, (5) recognizing the inherently multivariate nature of analytic problems, (6) inspecting and evaluating alternative explanations." In brief, "information displays should be documentary, comparative, causal and explanatory, quantified, multivariate, exploratory, skeptical."

Click here for the whole article.

Odds On The Next Pope

As difficult as it's been, I've tried not to make any comments on the recent passing of either Terry Schiavo or Pope John. However, I just can't pass up a good finance angle.

I've used prediction (betting) markets in my class for years as a tool to explain how markets process information. These contracts traded in these markets are very simple - a contract based on a given event (i.e. Bush gets elected president or UNC wins the NCAA tournament) pays off $1 if the event occurs and $0 if it doesn't (in econ-speak, it's an Arrow-Debreu security). So, the "fair price" of the security would be the probability of the event occurring. Prediction markets have been useful tools for aggregating information.

Tyler Cowen at Marginal Revolution brings us the following roundup of betting markets related to the papal succession:

Try here, here, and here, with the latter offering discussion as well. Thanks to the ever-keen Naunihal Singh for the pointer.

Addendum: Here are Tradesports.com odds by country, thanks to Paul N for the pointer.

Update: welcome to all the visitors from Hughhewitt.com - come on in, make yourselves comfortable, and have a look around.

Economics In One Lesson

From Lynn Kiesling at Knowledge Problem:

Henry Hazlitt's seminal text Economics in One Lesson is now fully available online. It's a clear, straightforward articulation of basic economic principles.Thanks to the Foundation for Economic Education for doing so, and to Mahalanobis for the tip.

If you've never seen this book, take this opportunity and download it.

This Week's Carnival Of The Capitalists

This week's Carnival of the Capitalists is up, and brought to you by Gordon Smith at Law & Entrepreneurship News.

Information Asymmetry and Dating

The gang at Marginal Revolution has a category of posts they title "Markets in Everything" (warning: their taste in examples sometimes is a bit "out there", so be warned). Here's the latest:

...you can pop over to TrueDater.com and find out whether your prospective date is anything close to what the profile suggests.

TrueDater, not to be confused with True.com, is a database of reviews written by people who met through online personals. It's like Amazon.com, only instead of books, you're reviewing people. More specifically, you are reviewing their ability to represent themselves online.

Here is the story; the prescient Michelle Boardman suggested this idea some time ago.

Addendum: Here is a sample review.

Luckily, I've been together with the Unknown Wife for almost 15 years, so I don't have to deal with stuff like this. That's why, in relationship, I'm a firm believer in a "long-term buy and hold" strategy" (I did my asset selection, paid my price, and I plan on keeping my portfolio just where it is). In fact, when I get nostalgic for my single days, it's usually because I forget that they weren't all that great. Without going into too much detail, let's just say that there was a lot of search costs and adverse selection going on...

NYT Interview With Michael Jensen

Michael Jensen is one of the icons of modern finance. In addition to writing many of the most cited pieces in corporate finance he also was one of the founders of the Social Science Research Network. He was recently intereviewed in this New York Times Article (titled "An Early Advocate of Stock Options Debunks Himself") by Claudia Deutsch. It's fairly long, so I won't reproduce it here. However, it touches on a wide variety of interesting and relevent topics, including:

• The perverse incentives arising from option-based and stock-based compensation as it's currently used
• The agency costs of overvalued equity
• Using indexed options (options that are adjusted for cost of capital or peer-group performance)
• Whether options should be expensed

It's worth a look (as is just about anything written by Jensen).