Will a fragile banking system survive future runs? – Lawrence Schmidt

Lawrence Schmidt, Assistant Professor, Finance

From Barron’s. 

Events surrounding the failure of Lehman Brothers 10 years ago nearly brought down the world’s financial system. While much of the dust has settled, economists and policy makers still seek to better understand the forces that led a set of seemingly small losses on mortgage-backed securities tied to the U.S. housing market to trigger the worst global financial crisis since the Great Depression.

A strong candidate is the series of “runs”—large-scale, rapid withdrawals of short-term funding—that took place throughout 2007-08. The most dramatic run occurred on money market funds (MMFs) immediately following Lehman’s collapse. In a week, investors withdrew more than $300 billion from this market. This figure likely would have been larger had the Treasury not taken the unprecedented step of offering temporary guarantees to MMFs.

What causes runs? One economic theory posits that runs are the result of, and exacerbated by, investors’ self-fulfilling beliefs about other investors’ actions. The nature of banking is fragile. The bank keeps cash on hand to meet depositors’ daily needs, but it will lose money and may fail if it runs out of cash and is faced with the difficult task of selling its loans on short notice. Suppose, though, a depositor is worried a “run” might take place. If she believes that others are asking for their money back she is incentivized to do the same. First out wins; last out loses. If, however, others are not in a panic, that depositor will wait it out and the bank survives.

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Social enterprise: what to look for in an MBA course – Georgina Campbell Flatter

Georgina Campbell Flatter, Executive Director at MIT Legatum Center, Senior Lecturer in Technological Innovation, Entrepreneurship, and Strategic Management

From Financial Times.

The developing world holds some of the fastest-growing economies. But some countries still present challenges.

The World Bank estimates that more than 736m people worldwide were living in extreme poverty in 2015, meaning they had no access to basic services such as water and sanitation, food, healthcare and education. To eradicate poverty, people need jobs. But 30m new vacancies are required every year just to keep up with the growth of the global working-age population, according to the UN.

A new generation of MBA graduates is trying to solve such complex problems by developing innovative, sustainable and scalable solutions that not only make money but also create employment.

The founders of Sanergy — David Auerbach, Ani Vallabhaneni, and Lindsay Stradley — met during an orientation hiking trip at the MIT Sloan School of Management, and set up the Kenya-based venture to make sanitation affordable and accessible.

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The good jobs strategy – Zeynep Ton

MIT Sloan Adjunct Associate Professor Zeynep Ton

MIT Sloan Adjunct Associate Professor Zeynep Ton

From Acast. 

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Zeynep Ton is a Professor of Operations Management at the MIT Sloan School of Management.

She studies the retail sector and the way that some firms have invested in paying more and doing more for their workers. She studied firms like QuikTrip, Trader Joes, Mercador in Spain – she found that firms that treat their workers better achieve better results.

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The hidden culprit behind stagnant wages – Nathan Wilmers

MIT Sloan Assistant Professor Nathan Wilmers

From The Hill

Slow wage growth since the Great Recession has been puzzling. As the economic recovery has clocked eight years of growth, unemployment has dropped, but real median wages have barely increased.

Commentators have looked for explanations in everything from the rise of artificial intelligence to the scarring effects of the decade-old economic crisis.

However, slow U.S. wage growth has a longer history. Relative to the rapid growth marking the post-World War II period, median real wages have grown little since the 1970s (except for the economic boom of the late 1990s).

A growing body of research points to the decline in worker bargaining power as a core explanation. The long membership decline of labor unions has made it harder for workers to demand higher pay.

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How companies can create a cybersafe culture at work – Stuart Madnick

Stuart Madnick, MIT Sloan Prof. of Information Technology

From The Wall Street Journal

As technical defenses against cyberattacks have improved, attackers have adapted by zeroing in on the weakest link: people. And too many companies are making it easy for the attackers to succeed.

An analogy that I often use is this: You can get a stronger lock for your door, but if you are still leaving the key under your mat, are you really any more secure?

It isn’t as if people aren’t aware of the weapons hackers are using. For instance, most people have heard of, and probably experienced, phishing—emails or messages asking you to take some action. (“We are your IT dept. and want to help you protect your computer. Click on this link for more information.”) Although crude, these tactics still achieve a 1% to 3% success rate.

Then there are the more deadly, personalized “spearphish” attacks. One example is an email, apparently sent from a CEO to the CFO, that starts by mentioning things they discussed at dinner last week and requests that money be transferred immediately for a new high-priority project. These attacks are increasingly popular because they have a high success rate.

The common element of all these kinds of attacks: They rely on people falling for them. Read More »