CAPITAL BRAINS: Finance and economics

1. Ancient Greek, in which the term referred to the management of a household or estate.

2. Thomas Carlyle, the 19th-century historian. He used the phrase in a book arguing for the reintroduction of slavery.

3. The 300th anniversary of Sweden’s Riksbank, the world’s first central bank. Its official name is the “Swedish National Bank’s Prize in Economic Sciences in memory of Alfred Nobel” and some people sniff that it is not a “real” Nobel prize. But winners receive their prize at the same ceremony as other Nobel laureates (apart from the peace prize).

4. Elinor Ostrom in 2009. Her work was on the management of collective resources. Only around a quarter of economics undergraduates in Britain are women.

5. Mathematics. Although he received a first class degree, he only finished 12th in the university for maths; he was used to being top.

6. a) John Maynard Keynes b) Milton Friedman c) Paul Krugman d) Paul Samuelson.

7. The phrase, according to Merriam-Webster, dates back to the early 19th century and relates to the use of water to try to get a pump working again, when blocked with air. In economic terms, it dates at least to the 1920s; a little stimulus can generate a lot more activity. It was not coined by Donald Trump, as he claimed in an interview with The Economist.

8. a) Sir Thomas Gresham, a financier in the Tudor era. The idea stems from a time when coins were made up of gold and silver. In theory, their metallic value was equal to their purchasing power; a pound coin was a pound’s worth of silver. But many coins were debased. So consumers will use the debased coins to buy goods and keep the pure coins; over time, only debased (bad) money will circulate. b) Jean-Baptiste Say, a French economist. When a good or service is sold, the revenue raised goes back into the economy as wages or profits. Those who receive the wages and profits thus have the money to buy other goods and services; there cannot be a general glut. c) Charles Goodhart, a British economist, first suggested this in 1975. The idea was used to criticise the money supply growth targets that were a key part of monetarism. Awareness of the target may cause individuals to alter their behaviour; as a result the given measure may no longer be a useful indicator.

9. a) Purchasing power parity—a measure of comparing standards of living across countries b) foreign direct investment—when foreign investors set up factories in a country (if they just buy shares, that’s portfolio investment) c) purchasing managers index—a measure of business sentiment.

10. a) David Ricardo—the consequence of this insight is that it is worthwhile for two countries to trade even if one is more efficient at producing all products than the other. b) Eli Heckscher and Bertil Ohlin c) William Jevons, Léon Walras and Carl Menger had the insight that the utility of each additional item to the consumer declines with quantity; owning a single car is very useful, but it is less useful for someone with 19 cars to buy a 20th.

11. Psychology. Mr Kahneman, along with former colleague Amos Tversky, established the field of behavioural economics, which studies how psychological quirks affect our behaviour.

12. Richard Thaler of the University of Chicago. He explained the workings of synthetic collateralised debt obligations. It was a lot more entertaining than it sounds.

13. Angus Maddison. He estimated that the global economy has grown 500-fold since the start of the common era (CE 1 or AD 1).

14. a) Earnings before interest tax, depreciation and amortisation b) cyclically adjusted price-earnings ratio c) residential mortgage-backed securities. The first is a core measure of the profits produced by individual companies; the second a method for valuing the overall stockmarket, based on averaging profits over 10 years; and the third are bonds, backed by home loans—the securities at the heart of the 2007–08 crisis.

15. a) Luxembourg at around $100,000 per head. The United States may be the biggest economy but some smaller countries are richer in individual terms. b) Burundi, at only $277. Sadly, the 14 poorest countries are all in Africa.

16. a) Ukraine and b) the Comoros. The standard measure is the Gini coefficient, which looks at the distribution of income; a figure of 1 means that all the income belongs to a single individual. European countries with their welfare states tend to be more equal, developing countries less so.

17. 8% and 7% respectively. Mutual funds carry charges and the index doesn’t, so it is very hard for the average mutual fund to beat the index, as the index represents the performance of the average investor.

18. a) John Pierpont, the founder of the group who dominated the American financial system in the late 19th and early 20th centuries. After he organised a rescue of the banks in 1907, politicians decided that a US central bank was needed b) Internationale Nederlanden Groep or International Netherlands Group, a Dutch bank c) Banco Bilbao Vizcaya Argentaria, a Spanish bank.

19. Montagu Norman, governor of the Bank of England from 1920 to 1944. A notable eccentric, he wore a broad-brimmed hat and flowing cape and suffered from regular nervous breakdowns. He liked to travel incognito on ocean liners.

20. a) Alan Greenspan b) William McChesney Martin c) Paul Volcker.

21. a) Alan Greenspan b) Paul Volcker c) William McChesney Martin.

22. RJR Nabisco, a tobacco and food conglomerate, which was one of the biggest targets of the leveraged buyout boom of the late 1980s. The firm was bought by the private equity group Kohlberg Kravis Roberts for $25 billion.

23. Benjamin Graham. Graham was the founding father of security analysis, writing classic books such as The Intelligent Investor and (along with David Dodd) Security Analysis. He pioneered the examination of balance sheets and value investing. Buffett studied under him at Columbia University and worked for his investment firm, Graham-Newman.

24. Technical analysis, or Chartism—the belief that past price movements predict future changes. The academic evidence for this is sketchy but there are plenty of people who follow the precepts.

25. Because it contained tallow or beef fat. This made the notes unacceptable to Hindus, vegans and others. The £10 note featuring Jane Austen is due to contain the same ingredient, but the Bank says it would cost too much to replace it. The Bank hopes that palm oil or coconut oil can be used in the £20 polymer note, due in 2020.

26. a) Morgan Stanley b) Visa c) American Express.

27. A mountain resort in New Hampshire in the United States.

28. John Maynard Keynes and Harry Dexter White. After the latter’s death, it was revealed he had passed information to the Soviet Union.

29. The International Monetary Fund and the World Bank.

30. A fixed exchange rate, free capital mobility and monetary autonomy (the ability to set interest rates independently). A country cannot have all three.

31. The United States. As of 2018, the person in charge is Jim Yong Kim.

32. France. As of early 2018, Christine Lagarde, a former French finance minister, holds the post.

33. a) India b) Spain c) South Korea d) Brazil.

34. a) Mongolia b) Vietnam c) Honduras d) Paraguay.

35. a) Rome b) Lithuania c) Athens.

36. 78%. Most people rarely use high-denomination bills, but they are widely held by those operating in the black economy: drug traders or simply small businesses evading tax. In other countries the proportion is even higher—in Thailand, China, Japan and Argentina, the proportion of cash held in the highest-denomination bill is more than 80%.

37. a) Equity Capital Markets b) Debt Capital Markets c) Fixed Income, Currencies and Commodities.

38. Basle, or Basel, in Switzerland. The BIS is best known these days for its regular reports on the health of the financial system and the global economy.

39. a) 1995 b) Geneva.

40. These are terms from the commodity market, where materials like cotton and oil can be bought immediately (spot) or sold at a later date (future). Contango occurs when the futures price is higher than the spot price; backwardation when the futures price is lower.

41. It ran to 848 pages. At the time of writing, the Trump administration is planning to repeal large parts of it.

42. 37. Those were the days.

43. R is the rate of return on capital and g is the growth rate of the economy. The idea is that if investment returns are higher than the growth rate, the rich will keep getting richer.

44. a) Edwin Lefèvre b) Charles P. Kindleberger c) Fred Schwed Jr.

45. Lombard Street: A Description of the Money Market. He believed that the central bank should lend freely in a crisis, but only against good collateral and at a high interest rate.

46. BB or below for Standard & Poor’s and Ba or below for Moody’s.

47. Postal reply coupons, which in theory could be bought cheaply in Europe and sold at a profit in the United States. In reality, Ponzi, like Bernie Madoff, paid off existing clients with the money he got from new clients.

48. It is a fund, or annuity, where all the proceeds go to the last survivor. Hence the temptation to commit murder.

49. Robert Merton and Myron Scholes.

50. a) Long-Term Capital Management; the author was Roger Lowenstein b) Enron; the authors were Bethany McLean and Peter Elkind c) Bear Stearns; the author was William Cohan.