Is bitcoin a viable currency? It’s probably too volatile — Jonathan Parker

MIT Sloan Professor Jonathan Parker

MIT Sloan Professor Jonathan Parker

From The San Francisco Chronicle

While bitcoin remains a hot-button issue, most of the talk has centered on the technology of this virtual currency. There are lots of questions: Is bitcoin really secure? Is it truly anonymous? Can it be counterfeited? Are transaction costs actually lower?

I have a more fundamental question: Is bitcoin a viable currency?

My answer is no, and not just because of the wild fluctuations in the value but because these fluctuations are destined to continue. A good currency serves three purposes. It is:

A unit of account, used to measure and write contracts for income, wealth and goods.

A means of payment, used to avoid barter.

A store of value, held to be able to make future transactions.

Of these, the third historically has been the most important. People will be wary of accepting something that might lose lots of value, and something with a volatile price makes a bad unit of account.

Basically, bitcoin lacks a mechanism for setting the supply equal to the demand. That is needed in order for bitcoin to maintain its value.

History is replete with examples of what happens to currencies with fixed supplies. When governments tie their hands in the supply of their currencies, much like bitcoin has done, the value fluctuates.

Read the full post at SFGate

Jonathan A. Parker is the International Programs Professor in Management and a Professor of Finance at the MIT Sloan School of Management.

Regulating today’s modern banking system — João Granja

MIT Sloan Assistant Professor João Granja

MIT Sloan Asst. Prof João Granja

Years after a devastating crisis that spread from the U.S. across Europe and Asia, policymakers all over the world are still trying to come up with strategies to make sure that a financial crisis of that magnitude never happens again. One essential element of this task is building back the trust of the public.

When the every day participants in the financial system—the depositors, holders of short-term commercial paper of banks, and other bank investors—feel confident in the banks, the financial system stabilizes. Business runs more smoothly. And growth improves.

In the U.S. our faith in banks is abysmally low. According to a Gallop poll conducted in June, Americans’ confidence in U.S. banks stands at 26%, up from the record low of 21% a year ago. The percentage of Americans saying they have “a great deal” or “quite a lot” of confidence in U.S. banks remains well below its pre-recession level of 41%, measured in June 2007. Meanwhile, across the pond, only 19% of Britons say that banks are well managed, according to the British Social Attitudes Report released in September.

Perhaps the simplest way to instill confidence in the public is transparency. That is: to compel banks to provide full and complete balance sheet information. They must disclose more detailed information to the public on their holdings of securities, government bonds, commercial real estate, and commercial paper; they must reveal their amounts of equity and capital; and they should be more forthcoming about outstanding loans and other liabilities. There should be no such thing as “off balance sheet” assets.

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Connectivity climbs post crisis — Robert Merton

From Financial Times

Interdependency between banks, insurers and countries through financial instruments was a factor blamed for the financial crisis. Now, academics are trying to measure it. Bob Merton, professor of finance at MIT Sloan, explains to John Authers that credit seems even more interconnected now.

Robert C. Merton is the School of Management Distinguished Professor of Finance at the MIT Sloan School of Management.

Watch the video at the Financial Times.

Containing Contagion: ‘There is no replacement for good macro-fundamentals’ — Kristin Forbes

MIT Sloan Prof. Kristin Forbes

What began as a singular sovereign debt problem in Greece in 2009 quickly spread to the rest of Europe. First Ireland; then Portugal and Spain and Italy. Today—only three years after the first signs of trouble—virtually all Europeans have felt the destructive effects of the euro zone turmoil, and its impact is being felt around the world.

Contagion, a phenomenon where financial tumult in one country or region spreads to another country, is now a fact of life. The globalization of finance has, in many ways, made contagion inevitable. The world has become much more integrated through trade, investors, and banks, and these ties have caused countries’ financial markets to move together more closely during good times and bad. Read More »

Low Bank Capital Is Next Fiscal Crisis: Simon Johnson

From Bloomberg News

The summer debate that has dominated Washington seems straightforward. Under what conditions should the U.S. government be allowed to borrow more money? The numbers that have been bandied about focus on reducing the cumulative deficit projection over the next 10 years, as measured by the Congressional Budget Office.

But there is a serious drawback to this measure because it ignores what will probably prove to be the U.S.’s single largest fiscal problem over the next decade: The lack of adequate capital buffers at banks.

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