A piece in the Guardian retells the old story about how the big end of town came out winners when the dotcom boom went bust. The sympathy for “small investors” is a bit overdone. Anyone could see that the dotcoms were a bubble, and many said so as loudly as possible, including yours truly . Those who bought into it and didn’t get out in time deserved all they got (nothing). But as the market hits five-year lows, it’s difficult to see how, in this world of defined-contribution superannuation, anyone can avoid being taken to the cleaners by stock-market operators.

My friend and colleague Gerry Garvey noticed this blog and sent me a working paper on whether the use of option grants as a way of boosting reported profits actually succeeds in fooling the markets. The short answer is “Yes”. For the long answer, with lots of algebra and econometrics, you can read the article.

This is a reply from Kenneth Rogoff to Joe Stiglitz. He lands some good punches, without, in my view, fully answering the Stiglitz critique of the IMF. As it’s long, I’ve posted it as a text file.

Plugging his new book, Gil Gordon asks us to Take the Turn It Off Quiz. I came out only moderately addicted because I don’t have a pager, and rarely use voicemail and mobile phones. If he’d asked how often I check my blogstats, on the other hand ….

One of the great things about the Web is the ability to find surprising links between seemingly unrelated themes. Combining two recent threads on this blog, here’s a piece linking O.J. Simpson to US accounting scandals.

Andrew Sullivan and others have argued that the epidemic of corporate fraud was confined to the bubble years beginning in 1999. In fact, the biggest and most widespread accounting fraud (a perfectly legal one) was the great options scam which drove the whole 1990s boom. As this article from 1999 shows, the divergence between the accounts reported by companies and those measured by the tax authorities was growing steadily in the years before 1999.

AndrewSullivan responds to the Gregg Easterbrook piece I posted yesterday>

CEO GREED: I’m with Gregg Easterbrook on pursuing the malfeasant CEOs who have essentially robbed shareholders while paying themselves exorbitant sums. Those of us who believe in free markets as the least worst way of organizing economies should be particularly incensed at this duplicity and larceny. But one reason for some restraint on the hype is precisely because so many liberals want to use these crimes as a rationale for enhancing government power over the economy, returning to the failed redistributionism and dirigisme of the past, and junking much of the free market gains of the last two decades. Gregg also fails to talk about bubble psychology as an essential context for these crimes. Such psychology excuses nothing. But it does help us understand why the last two years were particularly bad. On a minor note, am I the only one to object to setnences (sic, JQ) like the following: “Has conservatism reached the point that any development that transfers money to white male CEOs is deemed acceptable?” Why the “white male” interpolation? It’s factually accurate in the vast number of cases, but their gender and race is surely irrelevant to these CEO crimes. Can you imagine the New Republic publishing a similar phrase about “black males” in the context of, say, urban crime? Silly question.

Sullivan’s point about white males is a good one, though it’s surprising how often the whisteblower in recent cases has been a woman.
On the other hand, he’s whistling in the dark about the impact on free markets. Of the past two decades, only the five years from 1996 on produced any real gains for ordinary Americans, let alone the poor. It is precisely this period that now looks like an unsustainable bubble, generated by easy money and ubiquitous fraud.

Joe Stiglitz is the most effective and influential critic of the efficient markets hypothesis and its variants, such as the ‘Washington consensus’. Here is an interview with Salon, also a plug for his new book Globalization and its discontents

Business 2.0 confirms all my prejudices, asking What’s an MBA Really Worth?, and concluding that it’s a waste of $US 100 000 and two years. The article isn’t perfect. For example, it argues on the one hand that the MBA may have screening benefits by signalling that you are bright and ambitious, then questions statistical estimates finding no (statistically significant) difference between MBA’s and non-MBA’s by arguing that the two populations may be different. In fact, if you argue that entering students are more likely to be bright and ambitious, the implication is that the program actually has negative value. Also, it’s argued that MBA’s have too much theory and not enough practical stuff, but, I’d say that the place to get practical experience is the real world. The big problem with most MBA problems is that the theory is a grab-bag without the internal coherence of a discipline-based degree.

A big welcome to Kim Weatherall and Weatherall’s Law. Kim has joined the trend for Australian academics to set up weblogs, and also the minitrend for aqua-themed sites like this one, and that of Jason Soon.