tag:theconversation.com,2011:/us/topics/financial-assets-35355/articlesfinancial assets – The Conversation2022-02-22T17:13:01Ztag:theconversation.com,2011:article/1772042022-02-22T17:13:01Z2022-02-22T17:13:01ZHow authorities are targeting the ‘freedom convoy’ money via the Emergencies Act<figure><img src="https://images.theconversation.com/files/447568/original/file-20220221-17-1z0gfuq.JPG?ixlib=rb-1.1.0&rect=0%2C0%2C6720%2C4446&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A camper gets hauled away by authorities in Ottawa in front of a Bank of Montreal.</span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Cole Burston</span></span></figcaption></figure><p>The Canadian government gave itself extraordinary powers for a 30-day period to end the “freedom convoy” occupation of Ottawa by invoking the <a href="https://www.gazette.gc.ca/rp-pr/p2/2022/2022-02-15-x1/html/sor-dors20-eng.html">Emergencies Act</a>.</p>
<p>The situation was especially difficult in Ottawa, where trucks occupied the downtown core and Parliament Hill for weeks. Tensions with residents came to a breaking point after three weeks of incessant noise, shuttered businesses, harassment and disruption of normal life. </p>
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<p>Two types of emergency measures were adopted. </p>
<p>First, the <a href="https://www.gazette.gc.ca/rp-pr/p2/2022/2022-02-15-x1/html/sor-dors21-eng.html">Emergency Measures Regulations</a> prohibit public gatherings that could “lead to a breach of the peace.” The regulations also ban travelling to such gatherings, as well as providing any type of property in support of them.</p>
<p>Second, the <a href="https://www.gazette.gc.ca/rp-pr/p2/2022/2022-02-15-x1/html/sor-dors22-eng.html">Emergency Economic Measures Order</a> is aimed at starving the convoy of money and deterring people from supporting its activities. It deprived convoy participants of the ability to pay for gasoline to keep vehicles and generators running, food, hotel rooms, bouncy castles, fireworks, etc. The goal was to end the convoy’s activities so that the city of Ottawa could get back to normal without any need for a violent crackdown.</p>
<p>How did the federal government take away the convoy’s financial resources to force them to end their activities? It did so in two ways: by stopping new money from being sent to convoy organizers and participants, and by blocking access to funds already in their hands. </p>
<h2>Crowdfunding played a big role</h2>
<p>Stopping the flow of new funds means preventing donations from reaching the convoy’s organizers or anyone associated with them. Crowdfunding platforms have been the main vehicle for channelling donations to the convoy. </p>
<p>Until the Emergencies Act was invoked, the only way to stop donations from reaching the convoy was by appealing to the goodwill of crowdfunding platforms, as occurred <a href="https://www.cbc.ca/news/politics/gofundme-stops-payments-1.6340526">with GoFundMe</a>, or by seeking legal injunctions against them, <a href="https://www.ctvnews.ca/canada/ontario-court-freezes-access-to-donations-for-truckers-protest-from-givesendgo-1.5776674">as with GiveSendGo</a>. </p>
<p>In GiveSendGo’s case, the crowdfunding platform refused to abide by the judge’s ruling. It claimed that the Ontario court did not have jurisdiction over its operations since it’s based in the United States. </p>
<p>Furthermore, even if GiveSendGo had respected the injunction, donations to the convoy would have just moved to another platform. That’s what happened after GoFundMe froze the funds destined to the convoy; donors moved to GiveSendGo and other platforms, including ones collecting donations in <a href="https://finance.yahoo.com/news/canadian-trucker-protest-raises-over-161208767.html">cryptocurrencies like Tallycoin</a>.</p>
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<p>The emergency economic measures now require domestic and foreign crowdfunding platforms to register temporarily with the <a href="https://www.fintrac-canafe.gc.ca/intro-eng">Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)</a>. </p>
<p>This means they must provide FINTRAC with information about donations sent to the convoy (or similar activities being organized), no matter the amount. That’s because the convoy i<a href="https://www.newsweek.com/givesendgo-risks-breaking-anti-terrorism-laws-funding-truckers-protests-1679191">s now considered akin to a terrorist organization.</a></p>
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<p>According to Barry MacKillop, FINTRAC’s deputy director for intelligence, crowdfunding platforms were not under FINTRAC’s regulatory purview <a href="https://www.fintrac-canafe.gc.ca/new-neuf/ps-pa/2022-02-10-eng">until the Emergencies Act was invoked</a>.</p>
<p>Why such platforms were not already covered by existing rules is unclear, since they are in the business of <a href="https://www.cigionline.org/articles/authorities-were-warned-about-extremist-fundraising-online-but-did-not-seem-to-hear/">remitting or transmitting funds</a>. In any case, Finance Minister Chrystia Freeland plans to introduce legislation so that crowdfunding platforms <a href="https://www.canada.ca/en/department-finance/news/2022/02/remarks-by-the-deputy-prime-minister-and-minister-of-finance-regarding-the-emergencies-act.html">continue to register with and report to FINTRAC after the emergency ends</a>.</p>
<p>Once FINTRAC receives information on convoy donations from crowdfunding platforms, it analyzes the information and passes it on to law enforcement agencies like the RCMP. Law enforcement authorities are responsible for freezing the funds associated with these donations, not FINTRAC. </p>
<p>What happens to the seized funds depends on <a href="https://www.tpsgc-pwgsc.gc.ca/app-acq/gbs-spm/index-eng.html">the legal proceedings that follow</a>, but convoy donors could lose their donations forever. This possibility is aimed at deterring new donations.</p>
<figure class="align-center ">
<img alt="A police checkpoint is seen on a busy city street at dusk." src="https://images.theconversation.com/files/447572/original/file-20220221-25-1uofyle.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/447572/original/file-20220221-25-1uofyle.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/447572/original/file-20220221-25-1uofyle.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/447572/original/file-20220221-25-1uofyle.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/447572/original/file-20220221-25-1uofyle.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/447572/original/file-20220221-25-1uofyle.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/447572/original/file-20220221-25-1uofyle.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Police work a checkpoint after authorities took action to clear the ‘freedom convoy’ in Ottawa over the weekend.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Cole Burston</span></span>
</figcaption>
</figure>
<h2>Will foreign platforms comply?</h2>
<p>What isn’t clear yet is whether foreign crowdfunding platforms are complying with the new requirement to register with and report to FINTRAC (if they collect donations for the convoy), and, if they don’t, how they’ll be sanctioned. </p>
<p>For this reason, blocking access to financial services used by the convoy’s organizers and associates has probably been more effective at starving the protests of funds. The emergency economic measures require financial institutions, payments platforms, funding platforms, digital currency exchanges, etc., to stop doing business with anyone directly or indirectly associated with the convoy.</p>
<p>This includes freezing their accounts for the emergency’s duration. The measures also cover those who provide in-kind contributions to the convoy, like food or gas.</p>
<p>Fear of losing access to their money, even if only for a few weeks, should keep people and businesses away from the convoy and its activities. But law enforcement authorities must play their part. </p>
<p>First, they must collect the names of people and companies associated with the convoy and pass them on to entities providing financial services in Canada (so accounts can be frozen). Second, they need to ensure that sanctions are imposed on anyone in the financial system who does not abide by the Emergency Economic Measures Order.</p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/447574/original/file-20220221-28-ffj536.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A person walks past a shop that advertises a Bitcoin ATM." src="https://images.theconversation.com/files/447574/original/file-20220221-28-ffj536.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/447574/original/file-20220221-28-ffj536.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=441&fit=crop&dpr=1 600w, https://images.theconversation.com/files/447574/original/file-20220221-28-ffj536.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=441&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/447574/original/file-20220221-28-ffj536.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=441&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/447574/original/file-20220221-28-ffj536.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=554&fit=crop&dpr=1 754w, https://images.theconversation.com/files/447574/original/file-20220221-28-ffj536.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=554&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/447574/original/file-20220221-28-ffj536.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=554&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A sign advertises a Bitcoin automated teller machine, or ATM, at a shop in Halifax.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Andrew Vaughan</span></span>
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</figure>
<p>After that, the only way for the convoy movement to survive would be to conduct its entire business in cash. But with accounts in Canada frozen, where would the cash come from? It isn’t likely to come from <a href="https://www.vice.com/en/article/z3nw4j/freedom-convoy-truckers-struggle-to-cash-out-bitcoin-worth-dollar1-million">converting Bitcoins collected for the convoy into cash</a> because it’s too difficult to do without going through traditional financial institutions.</p>
<p>Cash would have to come from abroad, especially the United States, where accounts cannot be frozen. Already, anyone bringing more than $10,000 in any form into Canada must declare it. And border officials have likely been extra-vigilant about cash entering the country in the past few days.</p>
<p>The backbone of the convoy’s activities was its access to a steady flow of financing from donors both domestic and foreign. By deterring convoy supporters and participants, the federal government made it easier for law enforcement to bring a relatively peaceful end to an unprecedented crisis in Canada.</p><img src="https://counter.theconversation.com/content/177204/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Patrick Leblond is affiliated with the Centre for International Governance Innovation and the Centre interuniversitaire de recherche en analyse des organisations (CIRANO).</span></em></p><p class="fine-print"><em><span>Costanza Musu receives funding from the Social Sciences and Humanities Research Council. (SSHRC) </span></em></p>The backbone of the so-called freedom convoy’s activities was its access to a steady flow of financing from donors both domestic and foreign. The Emergencies Act put a stop to that.Patrick Leblond, CN-Paul M. Tellier Chair on Business and Public Policy, L’Université d’Ottawa/University of OttawaCostanza Musu, Associate Professor, Graduate School of Public and International Affairs, L’Université d’Ottawa/University of OttawaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1769402022-02-18T13:07:37Z2022-02-18T13:07:37ZWhat’s insider trading and why it’s a big problem<figure><img src="https://images.theconversation.com/files/447130/original/file-20220217-6550-cyk6ud.jpeg?ixlib=rb-1.1.0&rect=17%2C28%2C1180%2C777&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Gordon Gekko of ‘Wall Street’ may be the fictional face of insider trading. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/gaynoir/5305214442/in/photolist-95NBqw-8eZzB4-2gaXVpL-s2fCsr-nFPuiD-ePa76m-sjMYy-e6jgdi-MRVMs6-5RK9Tv-XKREac-5RK9Mc-81RGna-auj3wz-5RK9H2-68vXMh-cYpQN7-Mz8LB4-97yw6Q-5p1xpr-7AHWLs-tzMsB-8hihSo-eH7ZqQ-eH1Vdz-5MUVGL-326JuL-5mEuYn-5a7HTp-4oursp-2jPZoFt-7KYrHv-2jP3Ezy-RNTZR-4ourhz-5J3hnY-2jMURif-2j1a7Sy-9zDy2t-2ge2gmQ-3ntYAr-darCBc-7BCEAG-nF4U7c-2jsS2ty-2jF4jgE-aDCTxL-byMpbz-Rc4DsU-5BZth">Ilona Gaynor/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>There’s a <a href="https://www.vox.com/2022/2/12/22930385/congress-bipartisan-stock-trading-ban-lawmakers-pelosi-schumer">growing bipartisan push to prohibit</a> members of Congress from buying or selling stocks. The shift follows news reports that <a href="https://www.nytimes.com/2020/05/26/us/politics/senators-stock-trades-investigation.html">several senators sold stocks</a> shortly after receiving coronavirus briefings in early 2020 and that at least 57 lawmakers <a href="https://www.businessinsider.com/congress-stock-act-violations-senate-house-trading-2021-9">have failed to disclose financial transactions</a> since 2012 as required by law.</p>
<p>Congress passed that law – the <a href="https://www.congress.gov/112/plaws/publ105/PLAW-112publ105.htm">Stop Trading on Congressional Knowledge Act</a>, also known as the STOCK Act – in 2012 to fight insider trading among lawmakers with increased transparency. But a <a href="https://www.businessinsider.com/congress-stock-act-violations-penalties-consequences-2021-12">chorus of legislators</a> and <a href="https://www.cnbc.com/2021/10/28/sec-probes-possible-insider-stock-trades-by-sen-richard-burr-relative.html">governance watchdogs</a> argue that it didn’t go far enough and isn’t working. </p>
<p>All this raises two important questions: What exactly is insider trading and what’s the big deal?</p>
<p>We are a <a href="https://scholar.google.com/citations?user=JfUEmSUAAAAJ&hl=en&oi=ao">finance professor</a> and <a href="https://scholar.google.com/citations?user=dnCoKIUAAAAJ&hl=en&oi=ao">an economics professor</a> who have been studying financial markets and how investors try to take advantage of access to information for their personal gain. Our research shows it’s very common but difficult to stop.</p>
<h2>What is insider trading?</h2>
<p><a href="https://www.investopedia.com/terms/i/insidertrading.asp">Insider trading</a> is whenever someone uses market-moving nonpublic information in the act of buying or selling a financial asset.</p>
<p>For example, say you work as an executive at a company that plans to make an acquisition. If it’s not public, that would count as inside information. It becomes a crime if you either tell a friend about it – and that person then buys or sells a financial asset using that information – or if you make a trade yourself. </p>
<p>Punishment, if you’re convicted for insider trading, can range from a few months to over a decade behind bars.</p>
<p>Insider trading became illegal in the U.S. in 1934 after Congress passed the <a href="https://www.investopedia.com/terms/s/seact1934.asp">Securities Exchange Act</a> in the wake of the <a href="https://www.investopedia.com/terms/s/stock-market-crash-1929.asp">worst sustained decline in stocks in history</a>. From Black Monday 1929 through the summer of 1932, the <a href="https://www.federalreservehistory.org/essays/stock-market-crash-of-1929">stock market lost 89% of its value</a>. The act was meant to prevent a whole litany of abuses from recurring, including <a href="https://www.investopedia.com/articles/stocks/09/insider-trading.asp">insider trading</a>. </p>
<p>The issue <a href="https://slate.com/culture/2007/09/how-wall-street-s-gordon-gekko-inspired-a-generation-of-imitators.html">was dramatized</a> in Oliver Stone’s 1987 classic movie “Wall Street,” in which ruthless financier Gordon Gekko makes millions of dollars by trading on inside information on several companies obtained from his protege, Bud Fox.</p>
<p>“The most valuable commodity I know of is information,” <a href="https://www.youtube.com/watch?v=2WDBI4nLtXQ">declares Gekko</a>, who by the end of the film is convicted of insider trading and sent to jail.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/2WDBI4nLtXQ?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Gordon Gekko explains why information is so valuable.</span></figcaption>
</figure>
<h2>‘Informed trading’</h2>
<p>While insider trading typically involves trading stocks of individual companies based on information about them, it can involve any kind of information about the economy, a commodity or anything else that <a href="https://www.cnbc.com/2022/02/09/stock-market-futures-open-to-close-news.html">moves markets</a>. </p>
<p>For instance, the monthly consumer price index figures <a href="https://www.cnbc.com/2022/02/04/fresh-inflation-data-could-fuel-further-market-volatility-in-the-week-ahead.html">have a huge impact on financial markets</a> at the moment because of concerns about inflation and how it will affect the pace of Federal Reserve interest rate hikes. That data is collected and then closely guarded, but a small number of people have access to it before it’s officially released, making the information extremely valuable if any of them wanted to profit off it. </p>
<p>Our own research on financial trading ahead of the release of U.S. economic data <a href="http://dx.doi.org/10.2139/ssrn.2637528">shows that financial markets tend to move</a> in the “correct” direction in the minutes before it’s released. That is, if the new data would be a positive for stocks, we saw patterns of stocks rising before that information becomes publicly available – something known as “<a href="http://www.labex-refi.com/wp-content/uploads/2017/04/Informed-Trading-and-Its-Regulation-mbf-2-24-17CLR.pdf">informed trading</a>.” We also found this to be the case on data released <a href="http://dx.doi.org/10.2139/ssrn.2339825">in China</a> and <a href="http://dx.doi.org/10.2139/ssrn.3502748">the U.K.</a>. This suggests that some traders may have advance knowledge of information in economic announcements.</p>
<p>Of course, alternative explanations could be that some traders are simply more skilled at collecting and analyzing available data that correctly predicts the economic announcements. For example, <a href="https://www.statestreet.com/content/dam/statestreet/documents/pricestats/PriceStats_productprofile_4PAGE.pdf">online prices</a> collected in real time can be used to predict inflation levels. Also, <a href="https://ssrn.com/abstract=3446701">satellite imagery</a> and <a href="https://ssrn.com/abstract=2826684">analyst forecasts</a> can be used to predict crude oil and natural gas inventory levels.</p>
<figure class="align-center ">
<img alt="Martha Stewart, flanked by U.S. Marshals, leaves court" src="https://images.theconversation.com/files/447122/original/file-20220217-23-1xrykmz.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/447122/original/file-20220217-23-1xrykmz.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=533&fit=crop&dpr=1 600w, https://images.theconversation.com/files/447122/original/file-20220217-23-1xrykmz.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=533&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/447122/original/file-20220217-23-1xrykmz.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=533&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/447122/original/file-20220217-23-1xrykmz.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=669&fit=crop&dpr=1 754w, https://images.theconversation.com/files/447122/original/file-20220217-23-1xrykmz.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=669&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/447122/original/file-20220217-23-1xrykmz.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=669&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Martha Stewart was found guilty of insider trading in 2004.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/EnronMirageEconomy/3101174e18964ced96e4e87edc376790/photo?Query=Martha%20stewart%202004&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=7&currentItemNo=6">AP Photo/Bebeto Matthews</a></span>
</figcaption>
</figure>
<h2>Common, profitable and hard to prove</h2>
<p>Research shows that <a href="https://dealbook.nytimes.com/2014/06/16/study-asserts-startling-numbers-of-insider-trading-rogues/">insider trading is common and profitable</a>, yet <a href="https://knowledge.wharton.upenn.edu/article/why-insider-trading-is-hard-to-define-prove-and-prevent/">notoriously hard to prove and prevent</a>. A 2020 study estimated that <a href="https://dx.doi.org/10.2139/ssrn.3764192">only about 15% of insider trading</a> in the U.S. is detected and prosecuted. </p>
<p>One of the more famous – and few – examples of insider trading being prosecuted was the <a href="https://www.chicagotribune.com/sns-ap-martha-stewart-chronology-story.html">2004 conviction</a> of businesswoman and media personality Martha Stewart for <a href="https://www.sec.gov/news/press/2003-69.htm">selling shares based on an illegal tip</a> from a broker. Another came in 2016, when billionaire Steven Cohen and his now-defunct SAC Capital Advisors hedge fund <a href="https://www.reuters.com/article/us-usa-insidertrading-sac-capital/cohens-sac-capital-in-135-million-settlement-with-elan-investors-idUSKBN13P2X0">entered into a US$135 million settlement</a> over <a href="https://www.newyorker.com/magazine/2017/01/16/when-the-feds-went-after-the-hedge-fund-legend-steven-a-cohen">insider-trading allegations</a>. The hedge fund also <a href="https://money.cnn.com/2014/04/10/investing/cohen-sac-capital-point72/">paid a fine of $1.8 billion</a> in 2014 over similar charges. </p>
<p>And in 2020, former U.S. Rep. Chris Collins <a href="https://www.washingtonpost.com/business/2020/01/17/former-rep-chris-collins-be-sentenced-insider-trading-case/">was sentenced to 26 months in prison</a> for passing on a confidential tip to his son and then lying about it to the FBI.</p>
<p>More recently, <a href="https://www.npr.org/2021/09/27/1041059924/2-top-federal-reserve-officials-retire-after-trading-disclosures">two Fed officials stepped down</a> in September 2021 after disclosures showed they were trading extensively in 2020 at the same time the U.S. central bank was spending trillions saving the economy from the effects of the pandemic. And Sen. Richard Burr and his brother <a href="https://www.cnn.com/2021/10/28/politics/burr-sec-investigation-stock-trades/index.html">remain under investigation</a> by the Securities and Exchange Commission over stock trades they made in February 2020 shortly after the North Carolina Republican received closed-door briefings on the pandemic. </p>
<h2>Why it matters</h2>
<p>Insider trading is not a victimless crime. By throwing sand in the gears of financial markets, people trading on inside information benefit at the expense of others.</p>
<p>A key characteristic of well-functioning financial markets is high liquidity, which means it is easy to make large trades at low transaction costs. Insider trading <a href="http://dx.doi.org/10.2139/ssrn.276179">adversely affects market liquidity</a> and makes transaction costs higher, reducing investor returns. And since a lot of people have a stake in financial markets – <a href="https://www.federalreserve.gov/publications/files/scf20.pdf">about half of U.S. families own stocks</a> either directly or indirectly – this behavior hurts most Americans.</p>
<p>Insider trading also <a href="https://ssrn.com/abstract=249708">makes it more expensive</a> for companies to issue stocks and bonds. If investors think that insiders might be trading bonds of a company, they will demand a higher return on the bonds to compensate for their disadvantage – increasing the cost to the company. As a result, the company has less money to hire more workers or invest in a new factory.</p>
<p>There are also broader impacts of insider trading. It <a href="http://dx.doi.org/10.2139/ssrn.3645579">undermines public confidence</a> in financial markets and feeds the common view that they odds are stacked in favor of the elite and against everyone else. </p>
<p>Furthermore, since inside traders profit from privileged access to information rather than work, this makes people believe that <a href="https://ethics.org.au/wp-content/uploads/2019/02/The-Ethics-Centre_180410-on-trust-and-legitimacy.original.pdf">the system is rigged</a>. </p>
<figure class="align-center ">
<img alt="Chris Collins arrives at a federal court as cameras record him" src="https://images.theconversation.com/files/447121/original/file-20220217-13070-azm93l.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/447121/original/file-20220217-13070-azm93l.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/447121/original/file-20220217-13070-azm93l.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/447121/original/file-20220217-13070-azm93l.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/447121/original/file-20220217-13070-azm93l.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/447121/original/file-20220217-13070-azm93l.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/447121/original/file-20220217-13070-azm93l.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Former U.S. Rep. Chris Collins pleaded guilty to insider trading and lying to the FBI. He was sentenced to 26 months in jail in 2020.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/CongressmanStockIndictment/d1a8f9fa60ff4b858db505d5daf1d3de/photo?Query=Insider%20trading&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=796&currentItemNo=6">AP Photo/Seth Wenig</a></span>
</figcaption>
</figure>
<h2>Curbing insider trading</h2>
<p>The odds of Congress prohibiting lawmakers from trading stocks got a boost when House Speaker Nancy Pelosi <a href="https://www.npr.org/2022/01/20/1074387320/pelosi-opens-the-door-to-stock-trading-ban">recently said she may support the idea</a> – though she’d like to see a ban also apply to the Supreme Court, which currently has no rules governing the practice. At least some Republicans, such as <a href="https://www.bloomberg.com/news/articles/2022-01-11/mccarthy-eyes-ban-on-lawmakers-trading-individual-stocks">U.S. Rep. Kevin McCarthy</a> and <a href="https://thehill.com/homenews/senate/593613-stock-trading-ban-gains-steam-but-splits-senate-gop">Sen. Ben Sasse</a>, also say they support a ban.</p>
<p>For its part, the Fed reacted to trading by its two former officials by <a href="https://www.federalreserve.gov/newsevents/pressreleases/other20211021b.htm">banning bank policymakers and senior staff</a> from buying individual stocks or bonds. </p>
<p>There are also less heavy-handed ways to curb insider trading. In recent years, policymakers <a href="https://abcnews.go.com/Politics/wireStory/labor-stop-giving-reporters-early-economic-data-70775151">in the U.S.</a> and <a href="http://theconversation.com/in-a-victory-against-spin-ministers-lose-pre-release-access-to-statistics-79793">the U.K.</a> have tightened procedures governing the release of economic data. In the U.K., for example, dozens of public officials used to get market-moving economic data 24 hours before the public release. After the practice stopped in 2017, we found evidence of <a href="http://dx.doi.org/10.2139/ssrn.3502748">significantly less informed trading</a> ahead of the release – suggesting it effectively prevented a lot of insider trading.</p>
<p>Surveys show widespread bipartisan public support for Congress to ban lawmakers from trading financial securities, with a <a href="https://conventionofstates.com/over-75-percent-of-voters-say-members-should-not-trade-stocks-while-serving-in-congress">recent poll showing 75% in favor</a>. While that doesn’t mean a law will get passed, it does put pressure on lawmakers of both parties to do something about the problem.</p>
<p>[<em>Get the best of The Conversation, every weekend.</em> <a href="https://memberservices.theconversation.com/newsletters/?nl=weekly&source=inline-weeklybest">Sign up for our weekly newsletter</a>.]</p><img src="https://counter.theconversation.com/content/176940/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A bipartisan group of US lawmakers is pushing for a ban on active trading by members of Congress following accusations that some of their colleagues may have engaged in insider trading.Alexander Kurov, Professor of Finance and Fred T. Tattersall Research Chair in Finance, West Virginia UniversityMarketa Wolfe, Associate Professor of Economics, Skidmore CollegeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1727292021-11-29T18:19:29Z2021-11-29T18:19:29ZOmicron and market sell-off: don’t be surprised if there’s more turbulence to come<figure><img src="https://images.theconversation.com/files/434183/original/file-20211126-17-1txwdtx.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">shutterstock</span> </figcaption></figure><p>Until the Omicron variant hit the headlines, the signs were that 2021 was going to close with a stellar stock-market performance. Most markets have been on the rise since the beginning of the year, with the <a href="https://finance.yahoo.com/quote/%5EGSPC/chart/">S&P500</a> up about 25% and the <a href="https://finance.yahoo.com/quote/%5EFTAS/">FTSE All Share index</a> up by about 10%. </p>
<p>There had <a href="https://abcnews.go.com/Business/stocks-soar-historical-highs-experts-conditions-ripe-correction/story?id=80303849">certainly been</a> some concern that share valuations were irrationally high. This concern was justified – especially if we take into account that most markets closed 2020 on a positive note, too. Having experienced the worst pandemic in 100 years, and also a significant global recession, it seems nonsense that stock markets should have gone so high – yet there seemed no signs of anything that would stop them.</p>
<p>But then came the news of the Omicron variant and the fear that surrounds it, which led to a <a href="https://www.theguardian.com/business/live/2021/nov/29/ftse-100-markets-airline-travel-oil-omicron-variant-worries-wall-street-business-live">massive selloff</a> on November 26 (and a partial rebound at the time of writing). So what should we make of this? Are financial markets acknowledging that we have been in a bubble, with share prices misaligned with the real economy, or is this just a temporary panic before a continuation upwards?</p>
<h2>What we know so far</h2>
<p>These are the facts: new coronavirus variant B.1.1.529 spread significantly in South Africa and Botswana and was identified as more contagious and less controllable than previously known variants. <a href="https://coronavirus.jhu.edu/region/south-africa">Daily cases</a> in South Africa are now nearing 3,000, which is still not much more than one-tenth of the peak reached in July. Only 24.4% of the population is vaccinated. </p>
<p>Cases of the Omicron variant have now been detected in many other countries, including the UK, Egypt, Belgium and Ireland. With the World Health Organization (WHO) <a href="https://theconversation.com/omicron-why-the-who-designated-it-a-variant-of-concern-172727">warning that</a> the new variant was likely to spread further and “poses a very high global risk”, many countries have closed their borders to air traffic from southern Africa. Simultaneously, the US, UK, EU, India and several other nations have implemented new restrictions on mobility and travel. </p>
<p>Despite the panic, Dr Angelique Coetzee – the doctor who first spotted the new variant, who also chairs the South African Medical Association – <a href="https://www.bbc.co.uk/news/av/uk-59450988">has told</a> the BBC that symptoms linked to Omicron have been extremely mild. Meanwhile, pharmaceutical companies are analysing whether their vaccines provide safe enough protection against Omicron, though we are yet to see conclusive results in any direction. </p>
<p>So it could well be that, despite the faster spread of the infection, its ultimate health, social and economic impact proves negligible. We simply do not know at this point. But detecting more uncertainty than before, financial markets have reacted with panic. <a href="https://www.ft.com/content/d5f35b64-30d7-41a0-b416-cf7d54b92443">For example</a>, the S&P500 tumbled 2.3% on Friday November 26 only to rise 1.1% on Monday November 29. Most markets gave up between 2% and 4%, which is a pretty substantial one-day fall.</p>
<h2>Future dangers</h2>
<p>What worries me most about the current economic environment is not so much the possibility that a new wave of infections pushes the beginning of the recovery even further back, but that the great uncertainty regarding the end of the pandemic hinders our ability to make decisions for the future. For example, companies are deferring important investments until the dust clears (like expanding current businesses or making acquisitions). Similarly, staff increases may be put off to avoid the risk of downsizing if the pandemic worsens again.</p>
<p>The real concern is that this is for reasons that are difficult to resolve in any quick timeframe: the winding road towards immunising the whole world, the lack of information about the effectiveness of the vaccine against all possible COVID variants, and the feeling that we cannot see the light at the end of the tunnel because the tunnel is longer than we thought. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/434525/original/file-20211129-25-a4vxkg.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Man putting up a sign saying temporarily closed because of COVID." src="https://images.theconversation.com/files/434525/original/file-20211129-25-a4vxkg.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/434525/original/file-20211129-25-a4vxkg.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=419&fit=crop&dpr=1 600w, https://images.theconversation.com/files/434525/original/file-20211129-25-a4vxkg.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=419&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/434525/original/file-20211129-25-a4vxkg.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=419&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/434525/original/file-20211129-25-a4vxkg.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=526&fit=crop&dpr=1 754w, https://images.theconversation.com/files/434525/original/file-20211129-25-a4vxkg.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=526&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/434525/original/file-20211129-25-a4vxkg.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=526&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Surely not again.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/caucasian-male-wearing-medical-mask-puts-1693447216">Supamotion</a></span>
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<p>It does not bode well if we compare monthly stock returns of the S&P500 in 2020 and 2021. If we exclude January and February as pre-pandemic months in most countries in 2020 (and exclude December 2021 since we don’t yet have data), it is striking to observe that 2020 was better in six out of nine months (the exceptions being March, June and September). </p>
<p>I remember how, back on New Year’s Eve 2020, I toasted 2021 – thinking that it could not be any worse than what we were leaving behind. But it is becoming clear that uncertainty today is even greater than a year ago, when we did even not have the vaccines that we have today. </p>
<p>Until we know when we will get rid of this virus and how our economies will regain strength, it will be too early to talk about recovery. So while investors and pension holders may see markets rising further into irrational territory in the weeks and months ahead, they will also be vulnerable to unpredictable lurches back down.</p><img src="https://counter.theconversation.com/content/172729/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Arturo Bris does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Investors dumped assets en masse as news of the new COVID variant spread.Arturo Bris, Professor of Finance, International Institute for Management Development (IMD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1485142020-10-22T00:16:30Z2020-10-22T00:16:30ZExplainer: why the government can’t simply cancel its pandemic debt by printing more money<figure><img src="https://images.theconversation.com/files/364862/original/file-20201021-13-1xahq8c.jpg?ixlib=rb-1.1.0&rect=26%2C8%2C5964%2C3359&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>With the government <a href="https://www.stuff.co.nz/national/health/coronavirus/120725802/coronavirus-government-doubles-borrowing-forecast-as-economy-worsens">borrowing heavily</a> to fund its pandemic response and recovery, it has been <a href="https://www.nzherald.co.nz/business/could-nz-write-off-all-its-debt-what-business-leaders-think/UPBQBYLGPOP3IQGN7G5Z5XFAE4/">suggested</a> it could simply cancel its debt by printing more money. That sounds like an attractive idea, but it is one that would have seriously adverse consequences. </p>
<p>Derived from “<a href="https://www.businessinsider.com.au/modern-monetary-theory-mmt-explained-aoc-2019-3?r=US&IR=T">modern monetary theory</a>” (MMT), the suggestion is that expansionary monetary policy (i.e. money creation by the central bank) be used to finance government spending. </p>
<p>According to proponents of MMT, a country that issues its own currency can never run out and can never become insolvent in its own currency. It can make all payments as they come due. Therefore, there is no risk of defaulting on its debt.</p>
<p>This is a flawed idea based on economic misconceptions. It has been opposed by economists, liberal and conservative, including Nobel laureate and New York Times columnist <a href="https://www.nytimes.com/2019/02/25/opinion/running-on-mmt-wonkish.html">Paul Krugman</a> and Harvard University’s <a href="https://scholar.harvard.edu/files/mankiw/files/skeptics_guide_to_modern_monetary_theory.pdf">Greg Mankiw</a>. </p>
<p>So, what does happen when the government wants to spend more than it raises in tax revenue? It needs to borrow money (known as deficit financing), and so instructs the Treasury to issue debt. </p>
<p>There are three major types of debt: <a href="https://debtmanagement.treasury.govt.nz/government-securities/treasury-bills">treasury bills, treasury notes and treasury bonds.</a>. Treasury bills have the shortest maturity (less than a year) while treasury bonds have maturities of ten years or more. They all must be paid back in the future. </p>
<p>The debt is typically held by banks, institutional investors and managed funds (such as Kiwisaver accounts). Because the government is not expected to default on the loans, the debt is considered to be secure. So, these bonds can typically be issued at lower interest rates than bonds from other financial entities.</p>
<h2>Where government debt goes</h2>
<p>When the Reserve Bank of New Zealand (RBNZ) engages in “<a href="https://www.anz.co.nz/content/dam/anzconz/documents/economics-and-market-research/2020/ANZ-RBNZ-QE-FAQ-20200507.pdf">quantitative easing</a>” it essentially buys up these government issued bonds. To do this, it prints currency to pay for the bonds and this currency goes into circulation, increasing the money supply.</p>
<p>Quantitative easing floods the system with liquidity — the amount of money readily available for investment and spending. In turn, this should put downward pressure on interest rates because money is cheaper to borrow when there is more of it.</p>
<p>The RBNZ can also lower the official cash rate (<a href="https://www.rbnz.govt.nz/monetary-policy/official-cash-rate-decisions">OCR</a>) to push retail interest rates (on mortgages and savings deposits) down. The aim in both cases is to make borrowing cheaper in the hope that businesses will borrow money to invest, in turn creating more jobs.</p>
<p>If the RBNZ is buying government bonds from the banks and investors who had bought them earlier, it follows that the creditors have been paid off. So why can’t the government simply write off this debt?</p>
<hr>
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<strong>
Read more:
<a href="https://theconversation.com/with-a-mandate-to-govern-new-zealand-alone-labour-must-now-decide-what-it-really-stands-for-144490">With a mandate to govern New Zealand alone, Labour must now decide what it really stands for</a>
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<p>Firstly, this takes away the RBNZ’s ability to act as an independent entity, which in itself is problematic. But even so, the debt does not disappear, it just takes the form of that additional amount of money floating around the economy. </p>
<p>At some point this extra money will end up being deposited in commercial banks and be held as reserves which earn interest from the RBNZ. </p>
<p>The currency in circulation is also legal tender backed by the authority of the government. If no one else wants to accept it, holders of this money should be able to sell it back to the RBNZ for something of value in return (US dollars, say).</p>
<p>One way or another, sooner or later the debt will have to be honoured.</p>
<h2>The risk of inflation</h2>
<p>In the meantime, if lower interest rates do not lead to business expansion and higher production (and there are good reasons to suppose they may not) then the net result is a larger amount of money circulating in the economy with no new production happening. </p>
<p>This will eventually set off inflationary pressures, which make savers worse off and provide a disincentive for saving. But saving by households is fundamental to making funds available for businesses to borrow.</p>
<p>In the absence of increased production this extra money may also make its way to non-productive financial assets such as equity and houses, setting off <a href="https://www.researchgate.net/publication/316804372_Quantitative_easing_and_asset_bubbles">speculative bubbles</a> in those markets. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/covid-19-is-predicted-to-make-child-poverty-worse-should-nzs-next-government-make-temporary-safety-nets-permanent-147177">COVID-19 is predicted to make child poverty worse. Should NZ's next government make temporary safety nets permanent?</a>
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<p>Why might businesses not expand, even with lower interest rates? In deep recessions it is not the lack of credit that holds them back, it is that they cannot sell their goods at prevailing prices. This reduces demand for labour, further reducing demand for goods because more customers are unemployed.</p>
<p>It becomes a vicious cycle of insufficient demand, where the key issue is not credit or liquidity but rather a <a href="https://researchspace.auckland.ac.nz/handle/2292/13330">crisis of confidence</a>. Monetary policy loses its teeth at this point, leaving fiscal policy (via deficit financing or tax cuts) as the only option.</p>
<h2>It’s all about trust</h2>
<p>However, government borrowing is a long-term game. The entire system, whether deficit financing or printing money, is based on trust — that the government will honour its debt.</p>
<p>Simply put, no government could satisfy all its creditors if they wanted their money back at the same time. But as long as the government keeps making the interest payments on the loans, or at least has the capacity to pay back some of those creditors (sometimes by borrowing even more), the economy remains stable. The juggler’s balls stay in the air.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/nz-election-2020-survey-shows-voters-are-divided-on-climate-policy-and-urgency-of-action-146569">NZ election 2020: survey shows voters are divided on climate policy and urgency of action</a>
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<p>If for some reason trust in a government goes, watch the balls come crashing down. Any hint of default or not honouring debt obligations will lead to long-term damage to a government’s reputation and its future ability to borrow. No one will want to hold the government’s debt in the form of government bonds.</p>
<p>When that happens, we see <a href="https://www.investopedia.com/terms/c/capitalflight.asp">capital flight</a> — money flows out of the country as people seek a return elsewhere. The value of the currency goes through the floor, with catastrophic effects on the economy, such as occurred during the <a href="https://en.wikipedia.org/wiki/1997_Asian_financial_crisis">Asian financial crisis</a> in 1997. </p>
<p>The economic crisis New Zealand is facing is real and deep. Attempting to cancel debt would only reduce trust in the government and risk making the crisis worse.</p><img src="https://counter.theconversation.com/content/148514/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ananish Chaudhuri has received funding from the Royal Society of New Zealand Marsden Fund. </span></em></p>Massive borrowing to fund NZ’s economic recovery due to COVID-19 cannot be written off without the risk of worsening the crisis it was designed to meet.Ananish Chaudhuri, Professor of Behavioural and Experimental Economics, University of Auckland, Waipapa Taumata RauLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1211412019-07-31T13:52:22Z2019-07-31T13:52:22ZA century of public housing: lessons from Singapore, where housing is a social, not financial, asset<figure><img src="https://images.theconversation.com/files/286445/original/file-20190731-186829-1omlg3j.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3699%2C1589&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Singapore_Panorama_v2.jpg">Someformofhuman</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>One of the beacons of UK social housing policy, the legislation from 1919 that became known as the Addison Act after its sponsor, the minister of health Christopher Addison, imposed for the first time a duty on councils to build good quality and affordable housing. But, as with most policies, it was only partially effective. Today, 100 years later, housing provision in the UK remains a major challenge, mired in problems of affordability and availability. </p>
<p>Britain is a home-owning nation, where housing is considered an investment asset for individuals rather than a social asset for society as a whole. This is unfortunate. As an investment, buyers pour their wealth into property on the understanding that they will benefit from rising values. The resulting price distortions lead to – among other things – localised skill shortages as key workers, teachers, nurses, firefighters are forced out by rising prices, unable to rent or buy.</p>
<p>But there are alternative arrangements to the hybrid housing economy that has developed in the UK – a mix of private sector ownership and renting and of housing provided by housing associations and (historically) by councils. </p>
<h2>Housing as a social asset</h2>
<p>Take Singapore, for example. Singapore had its own “Brexit” in 1965 when it separated from Malaysia. In 1960 the <a href="https://www.hdb.gov.sg">Singapore Housing and Development Board</a> (HDB) was formed to provide affordable and high-quality housing for residents of this tiny city-state nation. Today, <a href="https://www.hdb.gov.sg/cs/infoweb/about-us/history">more than 80% of Singapore’s 5.4m residents</a> live in housing provided by the development board. </p>
<p>These are issued by the state on 99-year leaseholds, and the value of the home depends on the inherent utility value of the property (size, type, location), with financing readily available, including that provided by the <a href="https://www.cpf.gov.sg/Members/AboutUs/about-us-info/cpf-overview">Central Provident Fund</a> (CPF). The CPF is a social security system that enables working Singapore citizens and those with permanent resident status to set aside funds for retirement. It is a compulsory savings scheme, which includes contributions from employers, to set aside funds for healthcare and housing costs in later life.</p>
<p>Property buyers in Singapore can fund the purchase of a development board flat with a bank loan, a loan from the HDB, with cash, or with funds drawn from the CPF. In a similar way to the leasehold system in the UK, the resale value of an HDB flat deteriorates as the lease end date approaches, in this case when the lease drops to under 30 years. As is the case in the UK, difficulties arise in trying to finance homes with short leases. However, the HDB leasehold system is different as the “owners” have bought only the right to use the flat – the property title and ownership remains with HDB. </p>
<p>Additionally, the development board prohibits Singaporeans from owning more than two residential units at any time. In the case of an inherited flat, ownership is only allowed if the inheritor disposes of their existing private or public residential property within six months of inheriting it.</p>
<p>The HDB remains by far the dominant national housing provider, building and owning most residential housing and playing an extremely active role. Private sector housing is available, but it is much more expensive.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/286446/original/file-20190731-186846-1e3xssd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/286446/original/file-20190731-186846-1e3xssd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/286446/original/file-20190731-186846-1e3xssd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/286446/original/file-20190731-186846-1e3xssd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/286446/original/file-20190731-186846-1e3xssd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/286446/original/file-20190731-186846-1e3xssd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/286446/original/file-20190731-186846-1e3xssd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Pinnacle, an example of more recent, high-quality public housing in Singapore.</span>
<span class="attribution"><a class="source" href="https://www.needpix.com/photo/download/1077406/the-pinnacle-singapore-public-housing-architecture-apartment-hdb-property-residential-modern">ScribblingGeek</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>A lesson in long-termism</h2>
<p>The differences between the approaches in the UK and Singapore are extreme. In the UK, council housing is considered to be a public sector cost – a burden to the taxpayer. For many people this is housing provision of last resort. In Singapore it is treated as an asset to the public purse, as well as a social asset – and carries no stigma, nor is seen as something to be avoided if possible. The UK’s mixed housing economy results in major social and economic distortions, whereas Singapore invests in housing precisely to avoid or counter those distortions.</p>
<p>In the UK, with the exception of the <a href="https://theconversation.com/what-is-a-garden-city-and-why-is-money-being-spent-on-building-them-44610">New Towns</a>, housing has tended to involve creating individual assets rather than an approach based on <a href="https://www.pps.org/article/what-is-placemaking">place-making</a> – creating neighbourhoods and communities. Singapore’s HDB housing units are built in HDB towns with housing units integrated with amenities including clinics, community facilities such as parks and sports facilities, and retail. As Singapore has developed economically, so HDB has also begun to produce more upmarket housing. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/286450/original/file-20190731-186805-1txc6cc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/286450/original/file-20190731-186805-1txc6cc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/286450/original/file-20190731-186805-1txc6cc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=311&fit=crop&dpr=1 600w, https://images.theconversation.com/files/286450/original/file-20190731-186805-1txc6cc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=311&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/286450/original/file-20190731-186805-1txc6cc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=311&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/286450/original/file-20190731-186805-1txc6cc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=391&fit=crop&dpr=1 754w, https://images.theconversation.com/files/286450/original/file-20190731-186805-1txc6cc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=391&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/286450/original/file-20190731-186805-1txc6cc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=391&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Plan showing the New Town of Milton Keynes, with city centre on a grid. Very few UK towns can be planned to such a degree.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-vector/urban-vector-city-map-milton-keynes-1248591391">Ink Drop/Shutterstock</a></span>
</figcaption>
</figure>
<p>Transferring the solution that works for tiny Singapore to Britain would be impossible, but perhaps there are lessons to be learnt regarding a longer-term approach to meeting housing need. </p>
<p>One is to adopt a more integrated approach to housing: the conversation in Britain is dominated by the number of units provided and at what price they are sold, but a more sophisticated discussion would include who that housing is aimed at, where it needs to be, and how it is designed in order to create <a href="https://www.thenatureofcities.com/2016/05/26/sense-of-place/">a sense of place</a>. As important is the need to ensure housing is completely integrated into existing urban infrastructure, including roads, public transport, schools and health services. </p>
<p>The fragmentation of housing ownership in the UK makes it extremely expensive to redevelop or make major modifications to existing residential areas – each owner would have to be persuaded to modify their property or sell up as part of a land assembly process. In Singapore, with a history of intensifying land use and population density, HDB ownership means it is able to rebuild old estates and maintain and develop the extent of integration with social amenities. </p>
<p>Major innovations are occurring that will transform the ways in which we live – and these must be reflected in our housing: more electric vehicles and driverless cars, home working, e-commerce and ever-increasing population densities in cities. The integrated approach of HDB means Singapore is able to take a long-term strategic approach to these changes – and so more easily ensure that residential areas have all the public amenities, public services, retail and transport infrastructure required for them to thrive. The UK would be wise to watch and learn.</p><img src="https://counter.theconversation.com/content/121141/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Bryson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The approach to housing in the UK hasn’t worked for years. What could we learn from how it’s done in other countries?John Bryson, Professor of Enterprise and Competitiveness, University of BirminghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/885112017-12-06T13:51:08Z2017-12-06T13:51:08ZThe Bitcoin bubble – how we know it will burst<figure><img src="https://images.theconversation.com/files/197931/original/file-20171206-933-mrs2fs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ready to pop?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/dachis/9720357616/in/photolist-fNXnEG-8dUyK9-qArLkv-f2mRTy-ruWmjN-qAeKhU-f2mRmJ-rx8QCJ-9yLQ7q-rfDKZJ-edijNS-oZyttd-qAeT9A-cPbRrN-EEP9D7-dhkf3J-Re5h3Q-wJNeum-arbxSe-5rFAfp-5rKVFb-kZirBD-5rFB6V-Qi3sKM-8TkC8T-8TkBAa-8TkB2c-8TkFSa-8bSyUz-iUv7cD-aiDT5h-dMp4kh-aiB95e-cC6hbY-96wSTr-iUxdWL-8dUyKd-9ztRVj-fNXnxw-cweAAW-2hPsv-6AeoaZ-HUvQfx-GneHex-9exQRt-W4yiiZ-YQbegi-8S8zAi-8SbHxL-dRsLkh">Adam Dachis/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>In the last year, the <a href="https://coinmarketcap.com/currencies/bitcoin/#charts">price of Bitcoin</a> has increased from less than US$800 to more than US$12,000. This huge spike in value has many asking if it is a bubble or if the high price today is here to stay.</p>
<p>Finance defines a bubble as a situation where the price of an asset diverges systematically from its fundamentals. Investment mogul <a href="https://www.bloomberg.com/news/articles/2017-11-28/vanguard-founder-jack-bogle-says-avoid-bitcoin-like-the-plague">Jack Bogle</a> says there is nothing to support Bitcoin, and the head of JP MorganChase, <a href="https://www.cnbc.com/2017/09/12/jpmorgan-ceo-jamie-dimon-raises-flag-on-trading-revenue-sees-20-percent-fall-for-the-third-quarter.html">Jamie Dimon</a> has called it a fraud “worse than tulip bulbs”. </p>
<p>Like any asset, Bitcoin has some fundamental value, even if only a hope value, or a value arising from scarcity. So there are reasons to hold it. But <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3079712">our research</a> does show that it is experiencing a bubble right now. </p>
<p>Together with <a href="http://business.dcu.ie/our-people/Dr-Shaen-Corbet">Shaen Corbet</a> at Dublin City University, we took as the fundamentals of Bitcoin elements of the technology that underpins it (and other cryptocurrencies). We looked at measures, which represent the key theoretical and computational components of how cyrptocurrencies are priced. </p>
<p>New Bitcoin is created by a <a href="https://www.investopedia.com/tech/how-does-bitcoin-mining-work/">process of mining</a> units called blocks. Bitcoin is built on blockchain technology – a digital ledger of transactions – which enables the currency to be traded independently from any central banking system, without risk of fake or duplicate Bitcoins being used. Instead of having a bank verify pending transactions (a “block”), miners check them and, if approved, the block is cryptographically added to the ever-expanding ledger.</p>
<p>So the first measure we examined relates to mining difficulty. It calculates how difficult it is to find a new block relative to the past. As per the <a href="https://www.investopedia.com/news/what-happens-bitcoin-after-all-21-million-are-mined/">Bitcoin Protocol</a>, the number of Bitcoin is capped at 21m (there are currently <a href="http://www.bitcoinblockhalf.com/">16.7m in circulation</a>). This means that as more people mine for Bitcoin and more blocks are created, each block is, all things being equal, worth less than the previous block. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/197937/original/file-20171206-933-1sdb7tk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/197937/original/file-20171206-933-1sdb7tk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/197937/original/file-20171206-933-1sdb7tk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/197937/original/file-20171206-933-1sdb7tk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/197937/original/file-20171206-933-1sdb7tk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/197937/original/file-20171206-933-1sdb7tk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/197937/original/file-20171206-933-1sdb7tk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Bitcoin mining affects the cryptocurrency’s values.</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
</figcaption>
</figure>
<p>The second measure we looked at relates to the “hash rate”. This is the speed at which a computer operates when mining. To successfully mine Bitcoin, you must come up with a 64-digit hexadecimal number (called a “hash”), which is less than or equal to the target hash. The faster you can do this, the better chance you have of finding the next block and receiving payment. </p>
<p>The third measurement was “block size”. This relates to how large the chain is at any given time, with larger chains taking longer to mine than shorter ones. </p>
<p>And lastly we looked at the volume of transactions conducted. Any asset, in particular any currency, which is more widely used will be more valuable than one which is used less frequently. </p>
<p>In our study, we examined data from Bitcoin’s early days – from July 2010 to November 2017. The price of one Bitcoin did not rise above US$1 until April 16, 2011, then to US$10 on June 3, 2011 and US$100 on April 2, 2013. Since then the price rise has clearly been exceptional. </p>
<iframe src="https://datawrapper.dwcdn.net/mygLM/1/" scrolling="no" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="450"></iframe>
<p>We then applied an accepted method that is used to detect and date stamp bubbles after they burst. In essence, this involves identifying the existence of an explosive component in a series. As the series, here the price of bitcoin, “explodes”, it runs the risk, like any explosion, of flying apart. </p>
<p>A possibly counter-intuitive result of this approach is that if a fundamental driver and the price of an asset both show an explosive component, we might not conclude a bubble is present. A bubble is when something deviates from its fundamental value. If the fundamental value is itself growing explosively then the price would also. </p>
<p>Think of dividends on a stock. If, somehow, these were to grow at an explosive rate we might expect to see the price do the same. While unsustainable, this is not technically a bubble. To overcome this, we then date stamp a bubble as being present when the price shows an explosive component and the underlying fundamentals do not. </p>
<p>Here are the results of the analysis:</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/197566/original/file-20171204-4062-195jztn.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/197566/original/file-20171204-4062-195jztn.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/197566/original/file-20171204-4062-195jztn.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=447&fit=crop&dpr=1 600w, https://images.theconversation.com/files/197566/original/file-20171204-4062-195jztn.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=447&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/197566/original/file-20171204-4062-195jztn.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=447&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/197566/original/file-20171204-4062-195jztn.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=561&fit=crop&dpr=1 754w, https://images.theconversation.com/files/197566/original/file-20171204-4062-195jztn.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=561&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/197566/original/file-20171204-4062-195jztn.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=561&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Bitcoin Bubbles.</span>
<span class="attribution"><span class="source">Authors own calculations</span></span>
</figcaption>
</figure>
<p>The orange lines denote when the price is showing explosive behaviour. We also see a period where the hash rate was growing explosively – the blue columns in late 2013 and early 2014. This is also an indication of a price bubble, which went on to burst.</p>
<p>So there are clear points where bubbles are visible – including now. The price of Bitcoin at present shows explosive behaviour in the absence of anything similar in its fundamentals. We see the price moving upwards in a manner that is not related to the technical underpinnings. It is a clear bubble. </p>
<p>A weakness of these tests and indeed all bubble identification tests is that they take place after the bubble has burst. Even this test, which can be redone as swiftly as new data arrives, is such. Bubbles by their nature grow in a compound manner – so even a day or two delay in addressing the situation can make a bubble significantly worse. </p>
<p>What is not yet available is an accurate advanced warning bubble indicator. In its absence, this approach may be the best. Unfortunately, we cannot use this approach to determine the extent of the bubble. There is no well-accepted model that suggests a “fair” value for Bitcoin. But whatever that level is, it is almost certain that, at present, it is well below where we are now.</p><img src="https://counter.theconversation.com/content/88511/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An analysis of Bitcoin’s fundamentals shows how much of a bubble its price has inflated to.Larisa Yarovaya, Lecturer in Accounting and Finance, Anglia Ruskin UniversityBrian Lucey, Professor of International Finance and Commodities, Trinity College DublinLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/697892017-03-08T04:01:18Z2017-03-08T04:01:18ZWhy ‘digital gold’ won’t ever kill off the real thing<p>In investment terms, a safe haven is exactly what it sounds like: a place of relative safety when times are tough. Traditionally, safe haven assets have been physical, such as gold and silver, the US dollar and the <a href="http://in.reuters.com/article/markets-swiss-franc-idINKCN0YV1VG">Swiss Franc</a>. </p>
<p>More recently, <a href="http://www.cnbc.com/2016/06/20/all-that-glisters-is-bitcoin-now-as-safe-a-haven-as-gold.html">Bitcoin</a>, and other intangible assets, have been entering this discussion. An example of the latter would be one of <a href="http://www.etfwatch.com.au/blog/digging-deep-into-australian-listed-gold-etfs">the many gold Exchange Traded Funds</a> (ETF), which are shares of gold holdings listed on a stock exchange, a financial claim, or <a href="http://www.reuters.com/article/usa-bonds-idUSL1N1FD13U">US</a> and <a href="http://www.reuters.com/article/eurozone-bonds-idUSL8N1D311M">German</a> government bonds. </p>
<p>But can these intangible assets really replace the tangible? What changes as our society becomes increasingly digital?</p>
<p>Let’s use gold as an example. Gold is a real and tangible asset, similar to currencies but unlike stocks, government bonds, virtual currencies and other financial claims. Gold is also durable with an effectively infinite longevity and thus completely different to any other asset.</p>
<p>These are the aspects that give gold its prominent position as a safe haven, and they are precisely what the likes of Bitcoin lack.</p>
<h2>Real safety versus financial safety</h2>
<p>Safe havens provide safety like a harbour does for boats against rough seas. The harbour does not protect the boats against all risks, but provides some protection against storms and big waves.</p>
<p>The question when it comes to intangible assets is whether this same kind of safety can be provided by something that is not real and tangible. In other words, could an insurance contract (a financial claim on an event) provide similar relative safety as gold? The answer is no.</p>
<p>An insurance contract can compensate for a loss, but it does not <em>avoid</em> the actual loss. The loss must be incurred and suffered first, and the compensation is only paid subsequently, with a delay. In other words, whilst the loss is immediate, the compensation is not.</p>
<p>A real safe harbour, in contrast, provides immediate safety and avoids a loss in the first place, i.e. the boat is not destroyed and lost in the rough seas of the ocean but it is protected by the harbour. This loss-avoiding feature may be particularly important if the asset also has some intangible features that can neither be valued accurately nor be fully compensated. Think of something like a unique painting.</p>
<p>Additionally, the insurance contract does not only fail to avoid the loss in the first place, it may also fail to pay any compensation if the issuing company is in financial trouble or bankrupt. This “<a href="http://www.investopedia.com/terms/c/counterpartyrisk.asp">counterparty risk</a>” is always there but may be large in times of financial stress and uncertainty, and thus when the safe haven feature is needed the most.</p>
<h2>Tangibility and durability</h2>
<p>We know from behavioural finance that humans <a href="https://theconversation.com/mood-swings-and-the-market-how-to-understand-irrational-investor-behaviour-5465">do not always act rationally</a> in a strictly financial sense. Some of these decisions are linked to elementary desires, such as the want to possess something that is tangible and additionally signals status and wealth. </p>
<p>Gold has <a href="http://www.barrypopik.com/index.php/new_york_city/entry/barbarous_relic_gold_nickname/">often been referred to</a> as a relic. But from a behavioural perspective, this may also mean it is ingrained in our subconsciousness and related actions. Put differently, as long as humans remain tangible, it is likely that they <a href="http://greatergood.berkeley.edu/article/item/hands_on_research">maintain a desire to hold real and tangible assets</a>.</p>
<p><a href="http://www.post-gazette.com/business/pittsburgh-company-news/2016/12/19/Most-companies-don-t-last-50-years-but-these-Pittsburgh-businesses-have/stories/201612180010">Very few companies</a> on the US stock exchange, for example, are older than 50 years. By comparison, gold has existed for thousands of years and any gold coin or gold bar will most likely outlive any company and their stocks and bonds. Put together, it is unlikely that a company that sells claims on gold, such as a gold ETF, will beat physical gold’s longevity. </p>
<p>So if you have the choice of physically holding gold coins and bars or buying a financial claim on gold, only the former is providing you with all the benefits of a safe haven. </p>
<p>There is another aspect to this physicality. While the stock market is a great invention, allowing investors to buy fractions of companies (buying a few shares rather than the entire company, for example), this was never a problem with gold. Gold is highly divisible, able to be manufactured and purchased from as little as a few grams right up to 12.5 kg gold bars. The main reason for not holding physical gold is the cost of storage, but this cost does not necessarily outweigh the counterparty risk alluded to earlier.</p>
<h2>The horror scenario</h2>
<p>Imagine there is a systemic shock that triggers global stock markets to fall by 15% within a couple of hours. You can’t access your online brokerage account immediately as the website is down. And by the time you can, the markets are in free fall and you would lose a third of your wealth if you sold some of your holdings. </p>
<p>It’s in this situation that tangible assets really come into their own. Your real and tangible assets – your gold coins and bars – will still be there and accessible. Trade in them can’t be halted by a company or an exchange, they can’t easily be seized or cancelled by a desperate government, and they don’t rely on a third party (such as an insurer) being able to pay. </p>
<p>Gold and silver will long outlast any of that. The tangible will provide you with some relief.</p><img src="https://counter.theconversation.com/content/69789/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dirk Baur does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New financial innovations and products are constantly being touted as the safe haven of the future. But physical gold has properties that will cause it to stick around.Dirk Baur, Professor of Finance, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/727682017-02-10T13:09:51Z2017-02-10T13:09:51ZHow renting can fix the UK’s broken housing market<figure><img src="https://images.theconversation.com/files/156333/original/image-20170210-23342-siyxk8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Thinglass / Shutterstock, Inc.</span></span></figcaption></figure><p>How to fix the UK’s housing crisis has been the subject of national debate <a href="http://cep.lse.ac.uk/pubs/download/cp382.pdf">for decades</a>. Universal home ownership is a popular goal, which successive governments have failed to achieve. This is largely because they have been faced with the paradox of increasing the supply of affordable housing while not encouraging house prices to fall, as this is widely regarded as <a href="http://www.bbc.co.uk/news/magazine-32065625">political suicide</a>. </p>
<p>One solution has been to promote policies that make it easier to get a mortgage or boost disposable income so that it rises faster than house prices. In fact, nearly ten years after a global financial crisis caused by the ready availability of mortgages to households with no ability to repay them, the UK government maintains its “<a href="https://www.helptobuy.gov.uk/">Help to Buy</a>” initiatives. These focus on helping people to borrow the large sums necessary to pay for unaffordable homes.</p>
<p>What has been missing from the debate is the role that renting can play in solving the UK’s housing problems. The government’s <a href="https://www.gov.uk/government/collections/housing-white-paper">latest white paper</a> is significant in that it features policies to help renters. But ownership remains the ultimate goal.</p>
<p>In the UK there is social and political pressure for people to “get a foot on the housing ladder” – even when, in many cases, it is financially preferable for households to rent. Although the benefits of home ownership are many, one should ask whether it is wise for governments to encourage – and subsidise – people to take on debt that they would otherwise not be able to afford, in order for them to place all of their financial resources into an asset that may be overvalued or unsuitable. </p>
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<img alt="" src="https://images.theconversation.com/files/156334/original/image-20170210-23321-18182x1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/156334/original/image-20170210-23321-18182x1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/156334/original/image-20170210-23321-18182x1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/156334/original/image-20170210-23321-18182x1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/156334/original/image-20170210-23321-18182x1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/156334/original/image-20170210-23321-18182x1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/156334/original/image-20170210-23321-18182x1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Must you get on the ladder?</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
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<h2>Eggs in one basket</h2>
<p>One of the most basic rules of investment is “don’t put all your eggs in one basket”. Yet most households do just that when they buy a home and then they leverage this investment by borrowing money. </p>
<p>This is <a href="https://authors.elsevier.com/a/1UAxQ3mS%7E2AT3f">much riskier</a> than placing all of your money in a fund that tracks the global stock market. Not only is it difficult to sell a house when you urgently need the money, if house prices fall – even by a not unusual 10% – your losses will be multiplied by the <a href="http://www.investopedia.com/terms/g/gearing.asp">gearing effect</a> of the mortgage. For example, if all of your savings amount to £20,000 and you use this as a 10% deposit to buy a £200,000 home, then you borrow the remaining £180,000, a 10% price fall will leave you with no savings and owing money to the bank if you then try to sell.</p>
<p>For previous generations, from the late 1970s onwards, the risk of homeownership has paid a commensurately high return because inflation has been generally positive but benign. And, at the same time, interest rates have trended down from double digits towards zero. </p>
<p>For those contemplating buying their first home today, however, the outlook for both interest rates and inflation is more uncertain. For example, Japan and more recently some eurozone countries have experienced prolonged periods of deflation. In the UK, despite efforts to keep inflation positive, actual realised inflation has been consistently below the Bank of England’s forecasts from the second quarter of 2013 until January.</p>
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<img alt="" src="https://images.theconversation.com/files/156335/original/image-20170210-23358-1hlun5o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/156335/original/image-20170210-23358-1hlun5o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/156335/original/image-20170210-23358-1hlun5o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/156335/original/image-20170210-23358-1hlun5o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/156335/original/image-20170210-23358-1hlun5o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/156335/original/image-20170210-23358-1hlun5o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/156335/original/image-20170210-23358-1hlun5o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Don’t bet on inexorable rises.</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
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<p>House prices vary <a href="https://www.cfainstitute.org/learning/products/publications/faj/Pages/faj.v67.n3.6.aspx">substantially over time</a> relative to both GDP and household income – confirming that housing is a risky investment. Furthermore, in markets where building land is in short supply (such as Japan and many parts of the UK), this variability is greater than in markets such as the US where it is more readily available to meet demand. </p>
<h2>When renting is better</h2>
<p>In a <a href="https://doi.org/10.1016/j.irfa.2016.10.004">recent paper</a> I demonstrate that renting can be a better financial option than buying in a number of circumstances. These include: if you do not plan to live in the same house for at least five to ten years; or if inflation is negative (deflation); or if the net rent saved by owning is less than your mortgage interest or the return you could have achieved by putting your money in other investments with a similar level of risk. </p>
<p>This is because rent typically includes substantial ownership costs such as building insurance, property maintenance and furnishing. So the money saved by owning a house is considerably less than the rent not paid. Another reason is that buying and selling houses incurs substantial transaction costs in the form of legal fees, transaction tax (stamp duty) and selling agents’ fees. These are much higher than rental transaction costs. So unless you plan to stay in the new home for a considerable time, the chances are that these higher costs will not be recouped by savings from rent or price appreciation. </p>
<p>Plus, although prices have tended to drift up in the long term, prices can and do fluctuate substantially in the medium term (five to ten years). So if you plan to relocate within a few years there is a greater risk of being unlucky in your timing and suffering a price loss. </p>
<p>Finally, purchasing a home fixes your housing costs and often incurs a substantial mortgage liability. This is good if prices and wages are generally rising – because the mortgage payments become more affordable as incomes rise. But, in a world of low inflation or deflation, mortgage liabilities remain fixed, but incomes, prices and rents tend to decline making it harder to sustain mortgage payments and harder to recoup the capital invested in buying.</p>
<p>There are many ways that governments can influence the affordability of housing besides helping financially constrained households to concentrate all of their savings into risky assets that they would not otherwise be able to afford. Allowing house prices to drop will always be politically difficult – homeowners tend to make up the <a href="http://www.newstatesman.com/politics/2017/01/can-new-political-divide-between-owners-and-renters-be-bridged">bulk of the electorate</a> that turns out to vote. But they could do much more to encourage renting, even if it does require a radical rethink in the British mindset when it comes to home ownership.</p><img src="https://counter.theconversation.com/content/72768/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Isaac Tabner is director of the MSc in Finance at the University of Stirling and a member of the CFA Institute, The CFA Society of the UK and the Personal Finance Society. The research underpinning this article was funded by the University of Stirling.</span></em></p>Renting makes financial sense in a number of circumstances; it’s time to move away from the obsession with home ownership.Isaac T. Tabner, Senior Lecturer in Finance, Director of the MSc Finance, University of StirlingLicensed as Creative Commons – attribution, no derivatives.