Banking regulation has been extensively discussed by many politicians, economists, and regulatory agencies after the subprime meltdown in 2007. I decided to write about this topic after following an interesting lecture about Competition Policy in Financial Markets. The lecturer Prof. dr. Maarten Pieter Schinkel specializes in competition economics and regulation at the UvA. Like any other economics course you might have taken in the past, I would like to start off by abstracting the world in a simple model using assumptions that may or may not occur in real life. However, as an economics student myself, it is nice to try modelling a complicated world in a relatively simple model. The goals are to try to see how exogenous (independent) shocks affect the chosen variables within the model. Firstly, when analyzing competition in financial markets and its effect on total welfare, we should dive into more detail about ‘competition’ or a ‘competitive market’. Some people naturally dislike competition, others might see it as something positive. In contrast to lawyers which focus on maximizing the surplus of the consumer, economists rather see the whole society benefit. They want to maximize the total welfare instead of just consumers surplus. To make it easier to picture: they want to maximize the size of the ‘pie’ and afterwards argue what the exact redistribution should be. Using Economic lingo: under perfect competition, the welfare maximizing price and quantity sold can be found by setting demand equal to supply. When determining prices, firms will undercut each other in order to attract customers. Eventually no economic profit will be made by firms so all of the welfare is captured by consumers. A perfectly competitive market sounds good, right?! Does a perfectly competitive market exist and is the Banking sector a good example? I have to disappoint you here, since there are hardly any perfectly competitive markets in the world. However, as I said earlier, it is important to be able to model the complex world in relatively simple models. This can be used as a proxy of how markets should be organized in order to design competition policy and laws. Achieving this ‘goal’ will maximize total welfare and at the same time benefit society. The banking sector has been shielded from competition policy for long periods of time. Firstly, the second-to-previous paragraph explains the welfare consequences when there is no restriction in the competition. In the case of the banking sector however, there is no such thing as a competitive market. Banks artificially create scarcity in the banking sector by making it more difficult to borrow money for individuals and firms. This will lead to a higher price, lower consumer surplus, slightly higher producer surplus, and total welfare which is lower because of the artificial scarcity that is created in the banking sector. This loss in welfare, because we move from a competitive to a non-competitive market due to non-competitive pricing, is called deadweight loss. Better: what are the possible reasons for government agencies and regulators to keep the banking sector from moving to a highly competitive market? Firstly, the banking sector is a strictly regulated market with high barriers to entry. The Dutch Central Bank and the Authority Financial Markets make it extremely difficult to start a financial institution in the Netherlands. A bank is not like a 7/11 you can open in just a couple of weeks. It takes time, regulation, large amounts of capital and high-end technology to do so. Secondly, brand naming also leads to difficulties for the banking sector in emerging into a perfectly competitive market. Many consumers are skeptical if they, for example, are buying their first property and have to take a mortgage. They perceive smaller financial institutions who provide mortgages as ‘riskier’ as for example a well-known firm such ING. Fewer firms will try to enter the mortgage market because it is difficult to capture a piece of the pie from larger banks. Thirdly, when there are too many competitive pressures this could lead to a decrease in effectiveness of adverse selection mechanisms. Normally, because banks lend out money to the consumer, they have an incentive to screen consumers properly to only choose the creditworthy people. However, if there is competitive pressure in the banking sector, profit margins will be lower, and banks will more easily lend out money in order to keep total profits the same. This means there is a higher probability for non-performing loans. In this case, there is an incentive for regulatory agencies and the Dutch Central Bank to not pressure commercial banks too much. These 3 elements could have been the reasons why the banking sector was not heavily regulated until 2007. According to the financial institutions, it was really important to have no government intervention. Regulators should just leave them alone and let the market work for itself. Despite the fact that they indeed were left alone, the financial sector was still extremely unstable and managed to disrupt the world economy. The question that raises now is: why shouldn’t we heavily regulate the financial sector? According to economic theory, in a perfectly competitive market, all firms make zero economic profit given a market equilibrating price. So all the inefficient banks that cannot produce against this equilibrium price should leave the market. Why should we shield inefficient banks with certain competitive policy? Why is there so many critics from the banking industry about all the regulatory regimes? Are we not better off if we would just aim for a perfectly competitive market?

Last week I received a message from my bank about the interest rate on my savings account. The bank announced that it would go down. Again. Since the credit crisis in 2008/2009, interest rates have been kept low by the European Central Bank to stimulate economic activity, and the interest rates on saving deposits are now very close to zero. The Triodos Bank even decreased the interest rate on their savings account to zero in March this year. Saving thus yields less and less. Many people complain about the low yield they receive on their money holdings, yet in 2015, still 60 percent of the Dutch public held all of their property on their savings accounts. An alternative for depositing your money is, of course, to hold an investment portfolio. The yields on investing can be certainly higher than the current yield on your savings account and if all people acted rationally, nobody would bother to save anymore. Why is the interest rate on savings so low, what is the difference between saving and investing, and why don’t we all invest? Quantitative easing After the credit crisis, the European Central Bank (ECB) started a program called ‘quantitative easing’. This program is a special sort of monetary policy whereby the Central tries to prevent hyperinflation, while it is still stimulating the economy. The ECB bought bonds for a total amount of 60 billion euros to increase the money supply and therefore lower the interest rate. By lowering the interest rate, it is easier for banks to borrow from the ECB and other banks. This provided some stability and security, which was definitely needed after the credit crunch. Also, due to lower interest rates where banks can borrow for, there is less saving needed. Banks can finance the loans they issue by either private savings or loans from the ECB. The ‘asset purchase program’ carried out by the ECB led to economic growth and a lower interest rate. The economic growth following from this program was derived from higher consumption (borrowing becomes more attractive) and higher investment (as saving becomes less attractive, people start looking for alternatives). Consumption in the Netherlands has increased by 1.6% in the first quarter of 2017 relative to the first quarter of 2016, and investment by 7.6%. According to these numbers, the monetary policy appears to be rather successful. Although investment has actually increased, still many people do not invest and hold all of their property on their savings account – which yields almost nothing. Investing Investing can take many forms. In the Netherlands, people invest mostly in houses (real estate), which is considered a safe investment. Due to the lower interest rate, mortgages have become more attractive and this has indeed led to more investment in fixed assets. Besides the fixed assets, people familiar with the stock exchange did increase their investment. However, the number of people that hold stock portfolios has roughly remained the same. It appears that investing in stocks is not that attractive to households as saving still is. Holding stock portfolios is a way to earn money on your property that you would otherwise hold on your savings account. Many people think of investing as something quite difficult and sophisticated, but in fact, there are a lot of investment funds that do the thinking for you. Investing can thus be as difficult as you want it to be. You can start investing from €100 a month if you decide to put your money in a fund, and different investment profiles differ in riskiness. If you do not like risk, you can invest in a rather ‘safe’ and diversified portfolio with mostly stocks of established companies that have proven to make constant returns over time. Although the rate of return of a low-risk portfolio is not that high compared to the riskier portfolios, the yield is still higher than the yield on saving accounts. Why don’t we all invest? Given the low interest rate on savings and the ease of investing – or at least the fact that you do not really have to understand the stock exchange market yourself – it is strange that such a little amount of people in the Netherlands invests. In my opinion, there are three reasonable explanations for this phenomenon: Risk aversion: people are not willing to take the risk of investment. Kahneman et al. (1991) discuss the concept of risk aversion, whereby they state that losses loom two times as big as gains. Due to this, many people try to avoid risk as much as possible, although it is often assumed that investors (and households) are risk neutral. The expectation that households would thus increase investments when the interest rate is low does not always hold. People may prefer a lower yield on savings to the possibility of a higher yield on investment, because the risk of ending up with less money than initially invested looms larger than the gains. The status quo bias: in the same research paper, Kahneman et al. discuss the status quo bias. Due to this bias, people prefer the status quo to a new (but maybe more beneficial) option. The status quo bias arises from risk aversion, because new opportunities often come together with risk, disliked by people. Because investing is a new opportunity for many households in the Netherlands, investing does not appear to be really attractive. The fact that one could also lose money makes it even harder to switch from saving to investing. The decrease in interest rates could thus not lead to higher investments, because people prefer the status quo to investing. People do not always choose the best of all options. Lack of money: another simple explanation for the fact that few households started to invest, is probably that they do not want, or are not able to spend money on a portfolio. For investing, you do need some extra money, because you cannot subtract your investments at any time once they have been made without selling the entire portfolio. The huge advantage of savings over investing is that you can get your money from your bank account whenever it suits you best. For investing, you therefore need a bit of extra money, which not every household has at hand. All in all we could state that the lower interest rates that were caused by the quantitative easing program of the ECB have had the hoped effects, although the effects on investing are ambiguous. The lower interest makes saving less attractive, and increases the benefits of investing over saving. In fact, we do not really see this happening as such. Likely explanations of this almost ‘irrational behaviour’ are risk aversion, the status quo bias and a lack of available funds. But while the interest rate on my own savings account is getting lower and lower, I am considering investing in the stock exchange market more and more… If you want to read more about investing, click here for Nando Slijkerman’s articles on Investing for Students part I and II.

Malcolm X once said “You can’t have capitalism without racism.” Exactly how much truth is there to the sentence? Is there a link between these two socio-economic concepts, even? Capitalism is an economic concept, which advocates for freedom of opportunities, whereas racism is a social idea which is based on prejudice. At the surface, they couldn’t be further apart. But if we dig deep, we find that they have one common thing, which is the fundamental for both: an oppressed society. But to understand this, we have to go back to 15th century Europe, which arguably was the birthplace of capitalism, and see how racism comes into play, especially in the United States of America. The definitive incident which marked the rise of a new, entrepreneurial socio-economic system was the break-up of the European village, thus reducing feudalism into a nominal order. Feudal fragmentation, class struggle, technological innovation, rapid civilization and most importantly, an expanding market, amongst other reasons, are some. The expanding market was facilitated by maritime trade and increased commodification of goods. However, the very fundamental law of economics states that resources are scarce, whereas their utility is practically infinite. Grappling with a short supply of labor and land, and increased demand for mercantile activities, European states set out to trade with foreign countries such as India and Indonesia. Increased maritime activity was also facilitated by seafarers setting out to explore the New World, which was a facade for finding and creating new colonies elsewhere. Before Europe embarked on this mission proto-capitalist societies were roughly comparable across the three continents, that is, Europe, Asia and Africa. Major cities throughout had proportionate populations and similar business techniques. Even means of production, maritime techniques and level of output were commensurate. Thus there is no evidence to suggest that capitalism was solely unique to European states. However, it can be argued that the rise of capitalism led to colonialism. And with this, came a significant turning point in world history: Europe’s conquest of the Americas. After the decimation of the Red Indians, colonists were left with vast amounts of land. However, there was an acute shortage of labor supply. Thus, Africans were shipped to America, as slaves. 1619 marked the beginning of the African slave trade in the United States. Consequently, the entire slavery enterprise was founded upon the framework of racial prejudice. Slavery and slave trade were major components of the American free enterprise system of the 18th and early 19th centuries and the ideology of racism was simply a convenient prop with which to support and justify the system. In a larger context, it was the basis for business, globally. Racism and imperialism were at the heart of forced expatriation of Africans to the New World, and the United States was an accomplice in this enterprise. One theory which explains this correlation between racism and capitalism is the Social Dominance Theory (SDT), which itself is a derivative of Social Dominance Orientation (SDO). SDO is defined as: “[the] desire to have one’s own most salient social group, however defined, be dominant over, better than or superior to any relevant outgroup(s)”. This is coherent throughout different social contexts and cultures. Both capitalism and racism have one thing in common: a desire for superiority over an oppressed populace. The black person’s value system was irrelevant to the mechanics of a capitalist society. Fast forward five centuries, we see how much this dynamic affects the world we live in. It is no surprise that given the United States’ turbulent legacy of racial denigration and oppressive capitalism, it affects the politics of the country that leads the free world. Barack Obama’s election and re-election marked the presidency of the first African-American citizen. This was widely seen as a progressive step, converging towards a future with no racial inequality. However, it was also stained with racist sentiments from white middle-aged working class. Barack Obama received the lowest share of the white vote, at 39%, by any winning presidential candidate in U.S. history, when he was campaigning against Mitt Romney in 2012. Obama was campaigning for his second term, so understandably his policy repercussions were reflected in voter choice. However, racial resentment may have resulted in Obama losing up to five percentage points. This demonstrates the significant role of racial attitudes in U.S democracy. The very candidacy of Obama sparked racial resentment, just because of who he was as a person. Non-white votes played an impactful role in the 2012 elections, with 71% of Latinos and 93% of African-Americans voting for Obama. Republican candidates have used racial resentment to appeal to many white working-class voters, resulting in a major shift of southern whites to the Republican Party. Presidential candidates do exploit the tension between blacks and whites, when they phrase racial stereotypes as the root of major problems. Donald Trump exploited this in 2016 with his Muslim ban, thus blaming the activities of ISIS on all the Muslims. This resentment, although not as overt, is the successor for biological racism that was prevalent till half a century ago. In Obama’s first year of presidency, racial resentment manifested itself politically as the Tea Party. It was driven by white racial backlash, under the pretext of fiscal conservatism and an all-new, grassroots movement. Another symptom of this resentment was fuelled by increasing racial tension and Donald Trump’s birther controversy, with the Muslim community facing a lot of backlash, and becoming the new “African-American” in terms of social indignation. The impact of racial resentment affecting national decisions stretches far and wide, and there are too many examples which are beyond the scope of this article. However, we link two very basic human desires: greed and dominance, which are reflected in capitalism and racism respectively. Thus, the rise of a capitalist society five centuries back led to colonization of the USA, which in turn created racism as a tool to fulfill its ever-growing demands. Therefore we see how capitalism and racism enable each other, in a symbiotic relationship. The wheels which facilitated maritime trade were lubricated by the sweat of the black man, five centuries back. Today, the white man fears that the societies they oppressed may finally burst out, and thus elect dangerous leaders like Trump. And that leads to an increasingly polarized world, a world in which we live.

“Ha!” exclaimed my nephew, Paul, during our weekly visit to the swimming pool. “I read in the newspaper that the Dutch economy grew by 3.4% in the last quarter.” I replied: “Quite spectacular, isn’t it, in particular because economists like Robert Gordon recently predicted that developed countries could at best achieve a long-run growth rate of around 0.5%.” “Hmph, you economists seem to have a hard time getting anything right,” said Paul bluntly, “you didn’t even see the last financial crisis coming.” “Not so fast Paul!” Paul swam breezily ahead of me. He shouted back: “Before you catch up with me, make sure you can give me three examples of where economists have made a meaningful contribution to society.” He had me by the balls. The first things that came to mind didn’t seem to work at all. “The insight that incentives matter” and “a deep understanding of the appropriate use of statistical models” seemed rather abstract and perhaps even trivial. “Some economists did foresee the financial crisis” sounded too much like hindsight wisdom. The chlorinated water also did not really help to defog my mind. Neither did the lack of Internet resources in the middle of the swimming pool. For a short while, I even started to doubt whether we teach anything at all useful to our economics students. But then I recalled Dani Rodrik’s book, Economics Rules, which I had read recently. Rodrik writes about the strengths and weaknesses of economics and expresses what he finds useful in the economic methods. Of course, I did not have the book at my disposal in the swimming pool, but I vividly recalled a couple of quite convincing examples of economists successfully changing the world by applying economic ideas to public problems. The first example is ‘Bretton Woods.’ At the end of World War II, delegates of all 44 allied nations gathered at the Bretton Woods Conference. Guided by John Maynard Keynes, “the towering English giant of the profession,” as Rodrik writes, a new system of monetary management was established. The Bretton Woods system obliged each country to tie its currency to gold in order to maintain a virtually constant exchange rate. The system proved extremely successful in that it “unleashed an era of unprecedented economic growth and stability for advanced market economics […].” Another beautiful example is the use of “game theory […] to set up auctions of airwaves for telecommunications.” As early as the 1950s, Nobel Prize laureate Ronald Coase advocated the use of auctions to allocate scare airwaves. It took a while, but in 1994 airwaves auctions became a reality in the US. Since then, thousands of licenses have been assigned in this way in the US, opening new markets for mobile telecommunications and raising over tens of billions of dollars in the process. Around the year 2000, many European countries followed by auctioning third-generation mobile phone (3G) licenses, raising more than €100 billion. Game theorists like Paul Milgrom, Robert Wilson, and Paul Klemperer have greatly influenced the design of the spectrum auctions. I had almost caught up with Paul when a third example occurred to me. In 2012, Alvin Roth and Lloyd Shapley won the Nobel Prize in economics for “for the theory of stable allocations and the practice of market design.” In the Dutch TV show De Wereld Draait Door, VU economist Pieter Gautier discussed a potential application of the Nobel Laureate’s ideas that was closer to home. He argued that the insights developed by Roth and Shapley could be used to improve the way pupils were assigned to high schools in Amsterdam. In Amsterdam, around 8,000 pupils enter high school every year. The problem is that some schools are overly popular so that not all pupils can enter their most preferred school. In the old allocation system, the pupils could only choose one school. If the school of their choice was oversubscribed, some pupils were rejected. These pupils could choose another school, but only one that still had seats available. The pupils and their parents were quite dissatisfied with the system and some found ways to ‘game’ it by strategically signing up for their second or third choice school. So, the city of Amsterdam quite happily picked up Gautier’s suggestion and invited a number of Amsterdam-based economists to propose alternatives to its allocation system. In 2015 Amsterdam implemented a new system based on the work of the Nobel Prize laureates. Although there were some complaints, overall the new system was considered an improvement over the old one and the city decided to retain it for the next couple of years. I sped up and gave Paul the three examples. He was easily convinced, which made me proud in that even for a layman the value added by economics might not be too hard to appreciate. When we drove home from the swimming pool, I thanked Paul for our inspiring conversations, not only at the pool, but also while watching football, during our family weekend, and in the pub. They helped me quite a bit in shaping my columns for Rostra Economica, of which this is, unfortunately, the last one.

In the past years, the world has witnessed a deterioration in international relations, a rise in aggressive nationalism and religious fanaticism, sluggish economic growth, an increasing economic inequality, unemployment rates, poverty rates, a collapse of a number of states, which are currently plagued in civil unrest, and a fall in law and order that is gradually crawling into even the most stable societies. Our world is an interconnected political-economic system and a disturbance in a point can affect the whole system and take it into a state of crisis. Look at how what started as a protest of a few hundred against the government in Syria, or a local dispute in Ukraine, ended up putting the two world most powerful militaries in a serious standoff. If human against human violence is destined to rise because of this perceived world direction towards crisis, it is important to be acquainted with the current most advanced killing capabilities humans possess. Almost all sovereign states (206 members of the United Nations) in the world have military forces. It is estimated that there are approximately 65 million individuals serving in militaries worldwide. In this article, I will list the military capabilities of the top 4 countries in the world starting with the strongest. The ranking is according to the 2017 list prepared by “Global Firepower” (GFP). The United States United States Armed Forces are the strongest in the world according to almost all military rankings. It is a military that is the most experienced in modern warfare. The US has gone through major 12 wars  and tens of side wars since its establishment in 1776. The US military is spread through military bases in all world continents. The US military’s main branches are: US Army, US Navy, US Air Force and US Marine Corps. T Annual Defense Budget: USD 587,800,000,000 (Almost 1/3 of total world military expenditure) Capabilities Active Military Personnel: 1,477,896 Total Aircraft: 13762 Total Naval Strength: 415 Total Tank Strength: 5884 Submarines: 70 Aircraft Carriers: 19 Nuclear Warheads: 6800 Biological Weapons: No Chemical Weapons: Yes 2. Russia The Armed Forces of the Russian Federation is ranked 2nd worldwide in terms of strength. The Russian military consists of the Ground Forces, Aerospace Forces, the Navy, Strategic Missile Troops, Airborne Troops and the Rear of the Armed Forces. Russia has military bases in a number of countries of Eastern Europe, Central Asia and has military existence in the Middle East through its bases in Syria. Annual Defense Budget: USD 44,600,000,000. Capabilities Active Military Personnel: 766,055 Total Aircraft: 3794 Total Naval Strength: 352 Total Tank Strength: 20,216 Submarines: 63 Aircraft Carriers: 1 Nuclear Warheads: 7000 Biological Weapons: Likely Chemical Weapons: Yes 3. China People Liberation Army (PLA) is the largest in the world in terms of manpower and is ranked the 3rd in terms of strengh. The PLA consists of five professional service branches: the Ground Force, Navy, Air Force, Rocket Force, and the Strategic Support Force. Annual Defense Budget:  USD 161,700,000,000 Capabilities: Active Military Personnel: 2,335,000 Total Aircraft: 2955 Total Naval Strength: 714 Total Tank Strength: 6,457 Submarines: 68 Aircraft carriers: 1 Nuclear Warheads: 260 Biological Weapons: Maybe Chemical Weapons: Suspected 4. India The Indian Armed Forces consists of the Indian Army, Indian Navy and Indian Air forces. Additionally, the Indian Armed Forces are supported by Indian Coast Guard and paramilitary organizations. Annual Defense Budget: USD 51,000,000,000 Capabilities Active Military Personnel: 1,325,000 Total Aircraft: 2102 Total Naval Strength: 295 Total Tank Strength: 4426 Submarines: 15 Aircraft carriers: 3 Nuclear Warheads: 110 Biological Weapons: No Chemical Weapons: Maybe Other countries in the world top 10 in terms of military strength are: France (nuclear, 300 warheads), UK (nuclear, 215 warheads), Turkey, Japan, Germany and Italy. Countries with weapons of mass destruction but are not in the top 10 list are: North Korea (10 nuclear warheads and has chemical weapons), Israel (80-100 nuclear warheads and has chemical weapons), and Pakistan (140 warheads and likely to have chemical weapons). With the current tensions in East Asia between the US and North Korea, a nuclear warfare probability isn’t excluded. In April 2017, North Korea has warned that a “nuclear war could break out at any moment”, as US warships move into the Korean Peninsula. It is noteworthy to know what damage nuclear weapons can inflict. How destructive existing nuclear weapons can be? There are approximately 15,000 nuclear warheads that are officially declared. However, since information on weapons of mass destruction possession by nations is kept as a secret of national security, the number is estimated to be more. One nuclear bomb can devastate a city. There are roughly 500 large cities with more than 1 million residents worldwide, so the current amount of existing nuclear weapons can cause a worldwide catastrophe. The following image shows the radius of impact of dropping the Russian “Tsar Bomba 50 mt”, the most powerful nuclear weapon in the world, on Amsterdam. Google features a tool that you can use to see how much damage specified nuclear weapons can cause in a given city. You can go to Ground Zero and nuke any city of your choice. Bewaren Bewaren Bewaren Bewaren

WannaCry Cyberattack – Yana Chernysh On the 12th of May, a wave of a cyberattacks hit many countries worldwide. The targets of the hackers were not only personal laptops and computers, but also the municipality, hospitals, and other socially important infrastructures. The four most affected countries were Russia, Ukraine, India, and Taiwan. The attack worked as follows: one receives a message on the laptop saying that all the files were encrypted. In order to recover the files, one needs to send a certain payment (around 300$), which is accepted only in Bitcoin. For this, the hackers give a certain amount of time, after which the price doubles. And lastly, if payment is not received, all the data will be deleted. This does not seem of such a big problem for average users. Most of the information does not have crucial value. Moreover, a lot of people use online storage systems nowadays. However, for hospitals or government systems, the data stored in the system has much more value. A lot of technology companies along with the government of some countries started working to find a way of decryption without paying. The attackers have already received more than 300 payments with a total value around 115 thousand dollars. Unfortunately, people who did pay the money found out that the data was still encrypted. It is said that the attack did not have that much negative impact as it could have had and that it was mainly focused on critical infrastructure. Terror attacks in Manchester- Atma Jyoti Mahapatra On the 22nd of May, explosions went off at a concert by American pop singer Ariana Grande, in Manchester. Almost 23 people were killed and about 116 got injured in these attacks. England is under high terror alert following these attacks. Initially hesitant to be termed as an attack by ISIS, there is growing evidence to support this notion. Salman Abedi, a 22 year old person of Libyan descent, has been identified as the suicide bomber responsible for these attacks. The police has found out more about the terror ring behind the attacks, and has arrested 12 people so far in connection with these attacks. A day after the horrific incident, the people of Manchester and people around the world showed solidarity with the victims’ families, taking to the streets and laying flowers for the deceased. Economics General Economics  – Hải Đăng Vũ The snap election in the UK for the upcoming June also prompts the candidates to release their upcoming economic plans. The proposals, as anticipated, are vastly different among the two parties: while Theresa May insisted on her plan to proceed on austerity measures that focuses on a tax increase to individuals and corporations, the Labour Party wanted to raise its expenditures on public programs including medium-term education plans and the NHS. In Europe, the outcome of the French election might have reignited interests of investors into Europe. With the earlier WannaCry Ransomware attack mid-May (also see below), the Stoxx Europe 600 Index could only improve modestly, with the CAC40 also performing positively. Prior to his expedition in Europe this month, US President Donald Trump officially submitted his provisional tax policies for the future, which has faced backlashes from Congress. His target of raising $2 trillion in tax revenues was brought into question whether the money would then be used to finance tax cuts or paying down deficits. Also being challenged on how the administration would raise the money, one of the complementary plans to help with raising tax revenues is the border adjustment tax. In short, import prices are going to increase by 20 percent. With the tax in place, it is promised that the overall effect is to also bring jobs back to the United States. Despite the unfavorable support of the tax coming from retailers, Republicans are determined to make their voices heard by launching an advertising campaign to promote its merits. China’s Belt and Road summit – Tsz-Tian Lu On 14th of May, some 29 countries’ leaders gathered in Beijing to attend what’s quoted as “China’s most important diplomatic event of the year”: a summit to honour China’s President Xi Jinping’s belt and road initiative (or sometimes you see the title being translated as “one belt one road”). You might wonder, why does it matter and what is this project with a confusing name entitled? Well, this project could turn out to be the most significant international infrastructure project of the 21st century with hundred billions dollars being invested across the globe. The primary reason for this initiative is that as China’s economic growth rate is gradually slowing down, the government is trying to create new markets for its exporting goods. Also, this is a geopolitical gambit for China to pursue its dream to constantly be the dominated country in Asia. The reactions from other countries are mixed, there is excitement as well as some suspicion on the project, such as it is just a smokescreen China is using to achieve something else. Oh, and about the weird name of this initiative; the belt is referred as the ‘silk road economic belt’, and the road is not really a road but rather it is a sea route that links China’s southern coast to Africa and Mediterranean. It is obviously a pretty ambitious project, but whether it will realise as expected is plausible. Business Netflix and Chill – Mostafa Al Shikh After the credit crunch in 2008 many financial institutions went bankrupt or had to implement a cost saving strategies in order to survive. This was almost 10 years ago, but after following the news the last couple of months, we can conclude that there are still cost cuts at many firms in the financial industry. An example of a company whose strategy consists of heavy downsizing is ABN Amro. After former CEO Gerrit Zalm presented its strategy a year ago, and said he saw a future for the bank that was heavily dependent on technological progress, human capital was suddenly less important in order to reach both its long as short term goals. The bank decided to fire thousands of older, less educated employees that had a client facing role and hire youngsters who followed a tech-related education. After receiving a lot of negative reactions everyone thought that ABN Amro would relax some of its retrenchments. Instead of this, ABN Amro decided to hit its employees in the worst way: prohibiting Netflix and Spotify on business laptops. The newest season of The House Of Cards will instead have to be streamed on their private laptops. The reason of this new rule is because of the network capacity, that is also used by the customers of ABN Amro, was overloaded by the many users of Netflix and Spotify. According to the IT department: ’15 percent of the network capacity is used on the consumption of the new Album of Kendrick Lamar and The House of Cards.’ The bank apologizes for the inconvenience and states that, in the first place, the network capacity is for the customers. General Business – Nando Slijkerman Chinese industrial profits rose 14 percent in April from a year earlier as global trade increased. Industrial profits climbed to 572.8 billion yuan ($83.6 billion) last month, the National Bureau of Statistics said Saturday, 27th of May. That compares with a jump of 23.8 percent in March, and an 8.5 percent increase last year. The U.K. elections are getting tighter, which could mean a nervy couple of weeks for pound traders. Sterling dropped Friday, May 26th, rounding off the worst week this year, as a poll showed Theresa May’s Conservative Party leading the main opposition Labour Party by just five points, a gap that even this month had been as high as 24 points in some surveys. That left investors questioning whether the Prime Minister would achieve the increased majority that had been baked into the pound for the past few weeks. If the result of the poll is uniformly spread nationwide, it could mean the Tories end up with a smaller majority than in 2015, according to the Times, a result which analysts say could spell more losses for a currency that was buffeted by the Brexit vote in 2016. Let’s have a look at the numbers. Markets were following each other very closely this month. Almost no diversification in the growth levels. Growth continues for Europe in March; AEX rose with 1.32% this month, and our German neighbors (DAX) did exactly the same by also increasing 1.32%. S&P increased 1.33%, and the Dow Jones increased by 0.67 %. Let’s monitor the developments with respect to the elections of Great-Britain closely, and see you on the markets next month! Politics J’amuse! – Raffaele Di Carlo On May 7th, Europe witnessed the second round of the French Presidential Elections, aimed at finding a suitable successor to former President François Hollande of the Socialist Party. The first round, which was held on April 23rd, saw a multitude of parties running, most notably the Socialist Party, the Republicans and the Front National among the vieille Garde of French politics, but also a significant amount of new movements, such as En Marche!, led by Emmanuel Macron and la France insoumise, led by Jean-Luc Mélenchon. After a scandal involving François Fillon’s family led the Republicans down the polls, and the Socialist candidate Benoît Hamon failed to gather enough consensus, the first round ended up with a ballot between Emmanuel Macron’s En Marche! and Marine Le Pen’s Front National. Monsieur Macron’s party might be considered of a liberal center, advocating for a more evolved European Union and free market. Mrs. Le Pen’s Front National may instead resemble many of the identitarian and nationalist movements that have risen to the spotlight all over Europe in the wake of the latest wave of terrorist attacks, with the only peculiarity of being much older: Le Pen’s father already faced (and lost to) Jacques Chirac in 2002, and the party itself was founded in 1972. The Front National is substantially protectionist, in the style of the far right, and opposes European politics, free immigration and trade. The second round ended with the victory of Emmanuel Macron by a substantial margin: 66.1% of votes against 33.9% obtained by the opponent, Marine Le Pen. Mr. Macron nominated Edouard Philippe, a Republican, as new Prime Minister, which might hint at a possible future coalition between the two parties. Don’t Mention the I-Word – Alma Rottem It was a parade of bad news for US President Donald Trump and a couple of bad weeks at the White House. A series of blows that raises some serious questions about the future of his term, here as follows: On May 9, Trump fired the director of the FBI, James Comey, who learned of his dismissal from the news. In a letter to Comey, Trump wrote: “…I greatly appreciate you informing me, on three separate occasions, that I am not under investigation“. What followed was a week of implicit presidential threats against Comey and memos recording Trump asking the FBI to drop its investigation regarding Michael Flynn and his Russian contacts. On May 17, deputy attorney-general Rod Rosenstein dropped a bomb and appointed former head of the FBI Robert Mueller to independently investigate links between the Trump administration and Russia. While all of this was happening, Trump has reportedly leaked a sensitive piece of intelligence in the presence of the foreign minister of Russia. Not a good couple of weeks for President Trump. While more and more Democrats and much fewer Republicans started to whisper quietly the word “impeachment”, Trump was off to his first foreign trip as president. First, he visited Saudi Arabia with a royal welcome, and then Israel, where he met with both Israeli and Palestinian leaders. Further stops include Rome, Brussels (where he made waves at the NATO summit) and Sicily; perhaps Trump’s meeting with Pope Francis on Wednesday provided a bit of consolation while news stories keep breaking back home. The Long Road to the Dutch Coalition – Leonie Ernst It has been 75 days since the Dutch voted for their House of Representatives. After the elections, which were won by demissionair Prime Minister Mark Rutte’s party, a new coalition has to be formed. As expected, this process is rather difficult. The results of the elections show that the Dutch differ from opinion on how to rule the country best. 14 parties were installed in the House of Representatives and putting together a majority for the cabinet takes at least four of them. The problem that arose during the past weeks is that the ideals of relatively bigger parties differ a lot. This demands compromises from all parties involved. The first option to be investigated was a coalition of the VVD (liberals), CDA (conservative), D66 (democrats), and GroenLinks (progressive). On the 15th of May, the informant – Edith Schippers, demissionair minister of public health – declared that the negotiations between these four parties had come to an end. Due to substantitive differences on migration, the parties did not see a bright future with a stable coalition existing of these four. Last Friday, Schippers talked to all party leaders to discuss the possibilities again. What makes the forming of the coalition even harder is that almost all parties have excluded one or two others. Therefore a minority coalition is going to be more and more likely. UvA Student council elections and NSE survey – Evrim Öztamur From Wednesday 10th of May until Tuesday 16th of May, the students of the University of Amsterdam voted on both the new Central Student Council, and the new Faculty Student Council. Both of these bodies work directly with the Rector Magnificus, as the representative of the Executive Board, and the faculty deans respectively to discuss policy changes, and also have the legally-binding right to approve these policy changes. Results for the CSR show that De Decentralen got three, UvASociaal two, and De Vrije Student two seats; with Ons kritisch alternatief receiving none. For the FEB’s FSR, List Sefa got seven, and UvASociaal three seats. In addition to the student council elections, the National Student Survey (NSE) has also concluded. UvA’s overall score has gone up to 4.03, from 4.01 last year, on a scale of 1-5. The average rating of other Dutch universities is 4.09 this year, which means that UvA is still below the average by a small margin. Most significant increases have been in the areas of career  guidance and preparation, study guidance, and information provision; all of which are areas that are very close to 3.5, or a ‘satisfactory’ score. Three new areas were added to the survey this year for group size, internationalisation and perceived difficulty for programmes.

Bitcoins’ price has doubled within a period of less than one year. Coming from 1,000$ per bitcoin in January 2017, it is now worth a bit more than 2,000$. But, what are bitcoins? How did it all start, and when and why is it used? These are the questions I’ll have a look at today. The starting path of bitcoin is a bit shady. The talk about bitcoin started in 2008 with Neal Kin, Vladimir Osman, and Charles Bry. They applied for an encryption patent application. All of them are denying any connection to the bitcoin. However, they also registered bitcoin.org, through an anonymous platform. The actual creator of bitcoin is Satoshi Nakamoto. It is believed to be a pseudonym for one person, or maybe a group of people, who are responsible for the creation of the most of the software. So it is still not clear who actually created this digital currency. This secrecy and an unclear view of why anyone actually needs this currency led to a big hype around bitcoin. However, bitcoin was still not popular during the first years and it retailed for less than a U.S. dollar until the beginning of 2011, where they reached parity. Why would anyone actually purchase bitcoins? Of course, there are stories about people who bought several bitcoins in the inception of the currency for super cheap, so now they can make a pretty big profit by reselling them—so it seems that bitcoins can be an investment on their own. The trading process is a bit similar to Forex (a global market for currency exchange). In Forex, traders play on exchange rates between the currencies. They explore and predict the future changes between two currencies and try to make profits. The riskier and the more volatile the currency is, the larger the profit. Bitcoin trading is similar in that people exchange the cryptocurrency for another currency, and it is much riskier than Forex trading due to its high volatility. The main difference between the two is how supply and demand are determined. Other currencies are controlled by the government and the demand for them is uniform. Bitcoin’s demand depends on other factors like public adoption and confidence. The supply of bitcoin is also different: Bitcoins are generated through a computerized mechanism, which makes just ‘enough’ bitcoins, meaning that there is a stable and necessary supply in the market. Other currencies’ supplies are determined by their respective central banks. Although there are obvious similarities between Forex and bitcoin, they are still very different in their mechanisms. What are other uses there for bitcoins? Initially, this digital currency was designed to operate independently from any regulatory structure to facilitate almost fully anonymous transactions locally and internationally. Also, the bitcoin transactions were not covered by any legal or regulatory structures until recently, when countries started accepting them as legal payment methods. Basically, bitcoins aimed at allowing people abandoning the system, going ‘off-books’  This might be useful in offshore or any other sort of illegal money exchange transactions. At the same time, it makes the transactions a bit more dangerous, as there is no basic consumer protection that is present in other transactions. Starting from 2014 more and more companies started accepting bitcoins as a payment method (e.g. Steam, PayPal, Microsoft, Dell). As well as that, several U.S. casinos started accepting this digital currency. Another field that started accepting bitcoins is the nonprofit sector: Charity companies like Greenpeace and several U.S. political candidates accept bitcoins as donations. Why is the price for bitcoins rising so rapidly? This is the question that interests a lot of people. After doing my research, I found several interesting details and events that contribute to bitcoin’s rise in value. They are not fully answering this question, but they do give some understanding of why the value if the digital currency increases. One of such events was the 2012-2013 Cypriot financial crisis. People wanted to secure their savings and protect themselves from currency fluctuations. Purchasing bitcoins was one of the ways to do it. A similar situation happened in Greece, where the overall interest and purchasing of bitcoins has increased due to the recent debt crisis. Having a digital asset, which is not correlated to your home currency, seems to be a secure method of protecting yourself from unpredictable currency fluctuations during the period of crisis. Among the more recent reasons can be an increase in interest and awareness of people about digital currencies. People are trying to find analogs to bitcoin, so they start purchasing other cryptocurrencies. It drives the whole market demand up, which leads to an overall price increase. Also, some countries are legalizing bitcoins as a method of payment. For example, Japan. In other countries, like Russia and India, there is some debate going on whether or not bitcoin should be legalized, but in both countries, the answer moves towards a yes. Bitcoin for me was first a very distant and unclear world. However, if you just go into a little bit more detail it becomes much clearer. I am not an investor or a professional economist to predict the future of bitcoin, but it seems to me that it is indeed becoming a more and more popular version of currency and who knows, maybe in several years, a number of special bitcoin ATMs all over the world will rise from 1200  (https://coinatmradar.com) to an enormous number.

Africa is home to more than 1 billion individuals. The figure might not sound surprising to you, but by the end of this century, the number of inhabitants in Africa is expected to increase by fourfold, and Africans will constitute about one-third of our global population. To accommodate the increasing population in Africa, international organizations and public institutions from developed countries alike have been devoting much of their effort and providing assistance to Africa through multiple means, mostly through financial aid packages. There is a striking difference when it comes to the approach from donors, however. Previously, the support from intergovernmental institutions was largely focused on providing money to the country of destination, whereas presently both public and private enterprises from Europe or America are increasingly involved in creating a sustainable development plan for Africa where improvements can be extended and maintained through many generations. With the young demographics in place (60% of the total population are below 30), there are multiple avenues that both local entrepreneurs and public institutions can take advantage upon to help to build Africa towards achieving their goal. While many African administrations have not completely demonstrated their self-capability to move a country forward, the voice from the Western countries has been imminent enough to influence the decision-making progress by the African governments, especially in developmental issues. The conversation that is mainly debated by experts and policy-makers is how to allocate these funds for development projects efficiently. Thanks to the coordination programs from various NGOs that are supported by cross-country partnerships, the EU has mostly prioritized their resources, including both financial and human capital, to aid with models for entrepreneurship into myriads of African nations. However, others believe that only by resolving the immediate problem of food deficit, through advanced techniques for agricultural production, long-term progress for sustainability will be achieved. The battle against hunger Africa is not only tasked with agricultural self-sustainability but is also key in tackling the issue of global hunger. However, Africa currently has more than 65% unexploited arable land and ironically, many African countries are forced to import food from private entities from outside the continent, accumulating up to $35 billion a year. However, arable land is in short supply, as the effects of climate change quickly prompt land degradation. The lack of food supply is now recognized as a deep concern for government officials, as this could easily be leveraged as an advantage if all resources are effectively distributed. By the same token, for international organizations, investment into improving the efficiency of agricultural production seems to be a no-brainer. However, because African communities are sparsely distributed throughout the geography, especially in Central and Eastern Africa, agricultural investment will not be sustainable without complementary support from other areas. This is why the rise of local and regional entrepreneurship is extremely vital for the future of Africa. The upsurge of entrepreneurship Recent developments in Africa have allowed modern infrastructure, especially telecommunications and financial services, to prosper. Upgraded facilities across Africa definitely help entrepreneurship being cemented as the pioneering trend for ambitious youngsters. In some developed African economies, the young generation does not bear the mindset of the generation of their parents. They are not working simply to feed their family; but rather believing in themselves as employers or leaders of the future. Even more so, they want to inspire other people with their innovative ideas. The first argument to be brought up in support for the expansion of entrepreneurship across Africa is that it is the foundation for the creation of jobs. With the alarming rate of unemployment in some rather developed economies in Africa, the role of startups in alleviating heightened job-seeking pressure is detrimental. As the number of newly-created enterprises increases, there present better opportunities for workers to have more diverse options; and vice versa, looking from the perspective of the employer, a higher chance of recruiting the right person. In South Africa, where the unemployment rate is currently capped at a staggering rate of 26.5 percent, the role of new businesses in resolving unemployment issues is extremely important. Furthermore, the existence of the growing informal sector in Africa (which constitutes as large as 60 percent in some African countries) also indirectly encourages the creation of such (informal) startups and hence more job opportunities. The encouragement of entrepreneurship also provides positive economic benefits to the country. Again, the simple idea is that innovative ideas mostly stem from the demand of economic agents (or consumers) in the economy. As such, new businesses which are inspired from these ideas will have had their production aligned with the existing demand from the market. Ultimately, the interrelationship between increasing demand and supply would promote economic growth. The lack of sufficient resources (such as public infrastructure) in many African countries has allowed young entrepreneurs to exploit these opportunities and develope their own formula for success. The creation of a single idea will inevitably stimulate other innovations to follow. The utilization of these ideas will effectively advocate further infrastructure development in business and technology that disseminates into other fields. For example, the modernization of education in some of the poorest countries in Africa has paid off well thanks to the use of advanced technology. In some countries, the adoption of modern facilities such as computers and medical equipment at the tertiary education level has enabled university students to gain valuable knowledge by keeping them posted with the latest technology. Even remarkably, some African students were even admitted into high-profile universities in the US or Europe immediately after their graduation in the university of their home country. However, excessive risk is always embedded in the investment of any kind of entrepreneurship program, especially in Africa. The lack of entrepreneurial knowledge of the new generation of businessmen is making overseas funding both insecure and difficult. Education that is specialized for the entrepreneurial training is especially not adequate enough in the undeveloped and developing African communities, so entrepreneurs are actually less inclined to realize a profitable investing opportunity. Even if an opportunity is realized and sufficient funding is granted, usually entrepreneurs lack the experience of comprehensive business management so as to deal with daily operations. Countries with a weak institutional framework are partly to be blamed as well since they are more likely to be unfavorable of an open business environment, a factor if being left to the market mechanism, will explode way beyond their control. Ready for the future A business that reinforces its production lines on agriculture, or “agribusiness”, is now something that attracts many young entrepreneurs as the industry requires less technical knowledge (experience is rather believed to be the most important factor), and is en route to be a lucrative business if done correctly. The idea of incorporating the two issues together sounds fantastic, as it bridges the gap between a long-term objective with a short-term target. The combination of both entrepreneurial knowledge and agricultural production is also commonly implemented across the continent of Africa, especially in Northern Africa and recently popularized in Sub-Saharan regions. Using search engines and inserting keywords such as “successful agribusiness in Africa”, the results may as well surprise you by how many success stories are listed on various websites. In Kenya, there are even some promotional websites that would specifically tell you in what agricultural business an individual should put their own investment into. In hindsight, investing into entrepreneurship, especially in agriculture, will resolve food deficit problem and keeping a sustainable growth path of Africa towards the end of this century. Of course, the answer is not straightforward as it practically sounds in this article. Usually, international organizations have usually taken the one-size-fits-all approach to all of Africa and do not consider the differences in fundamentals (to name some notable differences, the distribution of capital and resources) between countries, which has led to some undesired outcome for some projects. For instance, if appropriate education is insufficient in some countries, then it is less likely for entrepreneurship to be important. Therefore, international organizations should prioritize to resolve the problem of food deficit firstly, then sequentially moving on to programs that would encourage the rise of entrepreneurship.

Welcome back to investing for students. Last time, we talked about the principles of investing for students. We talked about the problems with transaction fees, and the level of risk aversion that you must determine for yourself before you start investing. In this second part, we are going to talk about how to analyze equities in your investment opportunities and how you can take advantage of this. If you want to invest in whatever financial product, you have to follow the news. This is the most important thing you have to do when you are investing. This can be explained as follows. Valuation theories state that when having perfect capital markets, all information is immediately priced in in the stock price (we are talking about equities here). Perfect capital markets are markets where assets are priced in total efficiency. So, in a perfect capital market, there are no arbitrage opportunities. Well, perfect capital markets do not exist, but lately, we have been coming very close. For example, the takeover bid of NN Group on Delta Lloyd. The bid was priced at 5.40 EUR per share, but it is just a bid, so there is some uncertainty. The takeover could not succeed, for example, so this risk is also priced in. When the bid is made public, the stock price of Delta Lloyd increases immediately to around the bid price. Sometimes it is slightly lower because the market believes that there is still some uncertainty or risk, but other times it could be slightly higher because the market believes that there would be another, higher, bid. As you can see in the stock chart, the stock price increased immediately after the news of the takeover bid went public in October. This makes sense, because when the takeover bid is accepted and nothing can go wrong anymore, you have an arbitrage opportunity if the stock price is not at the current level of the takeover bid. If the takeover bid is 5.40 EUR and the stock price is 5.00 EUR, as in the case described above, you could make a risk-free profit of 0.40 EUR per share. This is because you are ensured that NN Group is going to buy your stock for 5.40 EUR. This is how a perfect capital markets works. So, you now know how a perfect capital market works and that information is almost immediately priced in. You can understand why it is important to follow the news, but what should you look for? First of all, begin with your own agenda. Note all general shareholders’ meetings of stocks you are following or own. Read the minutes as soon as possible for any profit warnings or other information that could influence the stock price. The same applies to the publishing dates of monthly, quarterly, or yearly reports. First, read the predictions of various famous analysts from the major banks. If the market believes that the company is going to have a loss of 210 million, this will already be priced in before the yearly report is published. When the loss, eventually, seems to be 200 million, the stock price will increase due to a smaller loss than was expected, and therefore priced in. This also applies to macro developments. For example, Shell depends mostly on the price of oil. When production remains constant, costs will do so too. However, profit will not remain constant due to a variable oil price, and thus a variable selling price per barrel of oil. If oil prices increase, the profit of Shell should increase too and vice versa. As you might know, cash flows are a determinant in equity valuation models, so therefore, if oil prices rise, stock prices will increase too due to higher cash flows. So, now that you have determined a sector to invest in (i.e. the oil sector), how do you pick the right stocks? This is the part where all ratios, like the price per earnings ratio, are coming in. First of all, what are you looking for? When you are looking for more volatile stocks, you should take a high-beta-stock, for example. When you have determined the level of volatility of your portfolio, you have to pick the right stocks. You can analyze profitable stocks by using some ratios. The higher (or lower) the ratio, the better the stock. If the ratio is above (or below) sector average, you know that the stock is above sector average and might be a profitable stock. We are going the discuss the methodology of frequently used ratios. For formulas, please search the internet. Earnings per share (EPS): EPS is basically the profit that a company has made over the last year divided by how many shares are on the market. Price per earnings (P/E ratio): The price/earnings ratio (P/E) is the best known of the investment valuation indicators. The P/E ratio has its imperfections, but it is nevertheless the most widely reported and used valuation by investment professionals and the investing public. A high P/E ratio means investors are paying more for today’s earnings in anticipation of future earnings growth. Debt to equity ratio: The debt-equity ratio is a leverage ratio that compares a company’s total liabilities to its total shareholders’ equity. This is a measurement of how much suppliers, lenders, creditors and obligors have committed to the company versus what the shareholders have committed. A lower number means that a company is using less leverage and has a stronger equity position. Dividend yield (interesting for dividend stocks): A stock’s dividend yield is expressed as an annual percentage and is calculated as the company’s annual cash dividend per share divided by the current price of the stock. The dividend yield is found in the stock quotes of dividend-paying companies. Current ratio: The current ratio is a popular financial ratio used to test a company’s liquidity (also referred to as its current or working capital position) by deriving the proportion of current assets available to cover current liabilities. The concept behind this ratio is to ascertain whether a company’s short-term assets (cash, cash equivalents, marketable securities, receivables, and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses, and taxes). When you understand the methodology of these ratios, you can analyze stocks for specific purposes. If you want a healthy, unleveraged stock, you could use the current ratio and debt to equity ratio to analyze which stock fits this criterion, for example. You have to make yourself comfortable with different kinds of ratios to do proper analysis and know where to use which ratio. This was the last part of the Investing for Students series. Use a market simulator to test if you are ready to go on real financial markets, and I will see you there! Disclaimer: all named stocks are just for explanatory purposes. The situations described to explain some investment concepts are unrealistic and only serve explanatory purposes. Nothing in this article reflects any investment advice of myself or the company that I am currently employed at. Please note that investing is not without risk and that you could lose money on your investments. Bewaren #business #Trading #students #Investing #FinancialMarkets #Finance

What do Dutch tulips, tech stocks and U.S. residential mortgages have in common? They were all 3 part of the largest asset bubbles in history that eventually exploded after a period of time. Approximately 400 years ago The Netherlands suffered the first irrational asset bubble in the entire history called Tulipmania. After a while, bubbles tend to grow bigger and eventually can pop with disastrous effects on the level of GDP and wellbeing of a country. The same stages where followed in the cases of the Dotcom bubble in 2000, and the Credit crunch in 2007, but explaining them are beyond the scope of this article. I decided to focus on a case that is somewhat recognizable to a large group of students. Some try to find a room to stay at during their study or maybe their parents want to purchase a new house in our main capital. Housing prices have been increasing sharply throughout the last couple of years, especially in Amsterdam. I am going to try to answer the question of what the determinants are that fuel these inflationary prices. Is the Netherlands currently trapped in its second growing irrational asset bubble? It’s getting hot on the Amsterdam property market! Firstly, it is important to define what an asset bubble exactly is and why it is called irrational. An asset bubble is created when the value of a financial asset is significantly higher than its historical or intrinsic value. In the Amsterdam housing case, we use the taxation value as a proxy of the (fair) market value of a house. This market value of a property has many determinants. One of these determinants are adaptive expectations. Economic agents form their expectations on events in the past. So, if the price of a house increased 2% last year, it should be 2% more this year. Individuals will anticipate on this expected change in price by buying a house and earn a return on it. This will drive demand for houses up and indeed, a building in Amsterdam today is 2% more expensive than it was last year. If people keep forming their opinion on the value of an asset based on adaptive expectations prices will keep increasing structurally, without any reason, until something acts to stop it. This is called inflation inertia. Government intervention with a maximum price or a collapse of the housing market are examples of things that could stop the prices of properties to increase. In Amsterdam, until now there has been no or little intervention from the government to keep prices from increasing too fast. The average Amsterdam property value surged from 250.000 euro to a stunning 295.000 per house in just 3 years. If we look at London, a city well known for its astronomical housing prices there was just a rise of 14 percent compared to 21 in Amsterdam. The housing market in Amsterdam is showing signs of overheating. However, one of the most fundamental determinants are not adaptive expectations. Like any other financial asset, all the information available to investors and individuals should be already incorporated in the price of that security. The information is used to make optimal forecasts for prices and are called rational expectations. If individuals are indeed rational, and use all of the information available to base their purchasing decision, prices should accommodate on a stable level throughout time. Are consumers indeed using all the information available to them? Does the fair market value of a property truly reflects the intrinsic value of it, or is it just based on adaptive expectations? A psychological bias is a danger when people say that the prices will increase in the future because it has increased in the past. If something would put a needle in the bubble and stop the increase in housing prices it will may cause a deterioration on the balance sheets of corporations who own Dutch property. Besides this, the primary objective of the European Central Bank is to maintain price stability with an inflation percentage of around but under the 2 percent. The ECB has a mandate that gives them the opportunity to influence the money supply, it can print money until infinity and use it to buy bonds from companies and governments. By buying these bonds it influences indirectly the interest rate, specifically the London Interbank Interest Rate (LIBOR). This is the average interest rate that banks charge each other for interbank lending. This LIBOR rate is tied directly to many financial products such as mortgages and derivatives. If the Central Bank influences the money supply through bond purchases, it will decrease the discount rate, commercial banks can borrow money cheaper at the ECB to fulfil its short term liquidity. These banks now can offer a pool of cash to people who want to buy a home against a low interest rate. If the interest rate is low, it will be attractive for people to buy houses, demand for Dutch property will increase, leading to a sharp increase in prices. Alternatively, Amsterdam is the main hub for its financial district called ‘de Zuidas’. Many large legal and financial institutions such as ABN Amro, Houthoff Buruma, and Deloitte are located in this area in the south of Amsterdam. Many workers, both Dutch and international, want to buy or rent property near the Zuidas to minimize time commuting from their work to their home. Demand for Amsterdam property will increase, leading to a sharp increase in prices. Also, new housing that comes available gets scooped directly of the market mostly for a price higher than the asking price. This will lead to an ongoing shortage on the housing market and surging prices. Besides this, a few years ago the ‘schenkregeling’ was introduced in the Netherlands. Individuals with extra cash to spend or parents who are getting older and want to support their children financially could make use of this tax arrangement introduced by the government. Normally when leaving a lump sum for children, parents had to pay a bequest tax based on the amount of money given to their children. The government wanted to stimulate home ownership and decided to leave the first 100.000 euros of the bequest untaxed. There will thus be an incentive to purchase properties. Parents leave money for their children while not having to pay a large amount of tax, and children get a nice amount of money to purchase their first home. Alternative, the Dutch Loan-To-Value Ratio is one of the highest in Europe. This means that for every dollar of fair market value of a property, consumers can borrow the LTV ratio from the bank. The higher the LTV ratio, the more a person can borrow from the bank and the higher the incentive to purchase a home. In previous years, the LTV ratio exceeded 1 in the Netherlands which means that you could borrow more than the value of your house. People used it to renovate their apartment or to buy a new car. However the Dutch government and the central bank foresaw a sharp increase in accumulated debt of consumers and decided that it wants to bring back the LTV ratio to 1 in 2018. Consequently, the previous factors helped fuel the prices of Amsterdam residential properties. However it is difficult to answer the question of these factors caused an growing asset bubble that is about to burst. It is a fact that the Dutch government has to intervene if it wants to keep the Amsterdam housing prices from falling out of control. Several ways to do this is to decrease the LTV ratio, reversing the tax arrangement for bequests, building new property and thus increasing the supply of housing in Amsterdam. The danger however is the fact that consumers still form their expectations on the past and not on rationality. If this holds on for too long and investors realize that they are merely holding an overpriced 400.000 euro, 9 square meters bedroom in Amsterdam-West, this could lead to a huge selloff. Subsequently causing a collapse in the value of properties and may bring negative externalities along with it. If the house price decreases, this means that the wealth of a consumer decreases as well and so will consumption. For firms with assets that are recorded against fair market value, the value of the asset side will deteriorate and leaves them with negative equity.

We all heard about that magical fiat currency called bitcoin that exists without a central bank or a physical presence. Its digital existence is not particularly confusing as almost all of our banking has become electronic, especially in the Netherlands where having cash on hand is something that’s almost a rare occurrence. However, not having a central bank? That’s where things get a little bit confusing. Bitcoin works by utilising a technology called the blockchain in a globally distributed environment. Understanding what the blockchain is will show you how you can have globally accessible money and trust without anybody ‘printing it,’ and how (almost) anything else can be decentralised away from corporations and governments. How does the blockchain work? The question of what exactly is a blockchain is one that is rather enigmatic to a lot of people because of its complex mathematical and algorithmic base. However, it can be very easy to understand what it actually is when you try and focus on the pieces that form the blockchain, instead of the blockchain itself. Most importantly, understanding its inner workings will help you understand its significance. Very aptly named, the blockchain is a chain of ‘blocks’ that are chained to each other by the power of mathematics. Each block stores a chunk of arbitrary data, and in the case of bitcoins these chunks are the transactions between the users of the bitcoin network. In addition to these data, most importantly, these blocks contain a reference to the previous block in the chain. The power of mathematics comes into play with the reference part of a block. In the field of cryptography, there is a certain group of functions called hash functions. These functions are ones that take data of any given size into data of fixed size. Strong hash functions are able to apply this process such that even the smallest change gives a different result. Now, imagine that someone has put a block into this function and gotten a specific output; if you wanted to make any changes on the block, the hash of that block would make it clear that it was tampered with. The chain is formed through the use of these hashes, by referencing blocks to each other by immutable identities. If you want to change the content of these blocks, the references become invalid and effectively break the chain. This makes it such that someone can’t just swoop in and change what’s in the blocks—if they do, people will notice that the chain is broken immediately. To really understand why this is important, compare it to a regular chain. Let’s say that we have a chain on the rings of which are engraved when that one ring was made. One says 1923, the other says 1932, the other says 1935… Someone can come in and turn that 3 into an 8, and it won’t be apparent if done properly and people will believe that the chain started in 1928 and not 1923. If we had a virtual version of this exact same chain, you could try and make that change, but people would be able to tell immediately that the ring, or the block, was manipulated. That’s why the blockchain is important, you cannot rewrite the history, and you cannot lie. When there are thousands of people in a shared network, with each of them having a copy of the consensus-made blockchain, the chain enables them to share and store information—such as a ledger of transactions in the case of bitcoin. Bitcoin’s ledger cannot be manipulated or refuted, which means that you cannot launder your bitcoins or fake the balance of an account. What can we use it for? Aside from bitcoins, the blockchain has many uses and can be applied to a wide range of systems. Ones like the IPFS are built to allow people to store data in a decentralised manner. As opposed to a centralised data storage like Google Drive or Microsoft’s OneDrive, the IPFS makes sure that your data cannot be erased and has multiple copies that are accessible worldwide. Such distributes enables musicians to distribute their music for free, people from developing countries to access information at low cost and latency, and archivists to archive data that cannot be destroyed. Google or Microsoft on the other hand are corporations that charge for storage and have the power over what you store on their services. Others like OpenBazaar and Steem attempt to take pre-existing services and bring them to the control of people. OpenBazaar is basically a distributed version of Etsy that lets its users open stores and sell items in exchange for bitcoins. It notes that they have no fees whatsoever because “there’s no company or organization running OpenBazaar, there’s no one to charge you fees to list your products,” as opposed to Etsy, which takes 20 cents to list an item and 3.5% of your revenue when you sell one. Steem is a social network that operates in a manner similar to Medium (owned by Twitter), the difference is that they reward curators and content creators for their participation in the website. They use a currency mechanism similar to bitcoins as rewards, which can then be bought and sold at a cryptocurrency exchange. In essence, the main benefit of OpenBazaar is that it gives its users complete control over their stores and complete share over their revenues. Steem, although connected to a company, is using a blockchain-based rewards feature to facilitate user participation. There are many other systems that use blockchains to take existing concepts and give the power to the people. Sounds too optimistic? With all the talks about vote manipulation in electronic voting stations of the US presidential voting, you would think that applying blockchains to voting systems would be the next step. In 2015, I had the opportunity to talk to J. Alex Halderman about electronic voting systems and the security of them. Mr. Halderman is a professor of computer science at the University of Michigan and he contributed to the security analysis of the Estonian e-voting system. Estonia was the first country in the world to use Internet voting nationally, and in 2015 a total of 30.5% of the Estonian voters used the e-voting system. In their analysis, the team found severe security issues regarding the voting servers and voters’ computers—both of which were found to be open to tampering by foreign powers, by the means of changing votes and compromising the secret ballot. Although certain issues they discovered with the system, such as the ones regarding manipulation of vote counts, could be solved by the use of the blockchain, there are many other problems that make electronic voting as a whole unviable and even dangerous. My questions to Mr. Halderman about the application of a blockchain to e-voting systems and voter identification had answers that were not particularly exciting. He noted that “a dishonest election official could combine [encrypted ballot data] with the [cryptographic signatures of the voters] to find out how everyone voted,” which is something that is highly concerning. The only application of the blockchain in this case is having a list of all submitted ballots, but then that compromises anonymity, and anonymity in votes is something that is very important for voters from both free and authoritarian countries alike. In conclusion, he noted that the need for authentication further complicates the problem. To combine integrity, security and anonymity at an electronic voting system seems quite difficult whether you apply a blockchain to the ballot infrastructure or not, and those are all integral to a truly democratic voting system. It seems that although the blockchain is very useful for quite a lot of systems, certain ones have problems that cannot be solved by the use of blockchains. There is a strong hype surrounding blockchains, but seeing that it’s not the solution to all of our problems is one thing to note. Looking for more? In case you are interested in this topic and looking for more information, Room for Discussion of the University of Amsterdam is hosting a discussion about the impact of the blockchain technology with Louis de Bruin and Simone Vermeend. It will be held on May 19, 2017, from 13:00 until 14:00 at the Room for Discussion Podium in Roeterseiland Campus’ E-building.

What comes to your mind first as far as investing in the context of the financial sector? It is likely that people associate making an investment with matters like generating profit, high rate of return, risk and capital management, etc. However, as the notion of corporate social responsibility (CSR) is perceived to be much more crucial in recent decades, the way some people make investments evolved around it as well. Although being ethical is generally considered to be contradicting with pursuing high-profit margins, concepts such as sustainable finance, socially responsible investment and impact investing have become more and more popular in recent years. Furthermore, there is now a variety of products on the financial markets in which the fund managers possessed the philosophy of being socially responsible. So it is not only about the financial gains anymore, but also the social impacts your investment decisions can potentially generate. How exactly can you put these concepts into practices, and is it possible for products like this to ever become the mainstreams in the financial markets? The banking industry is without a doubt in a critical position to contribute to the transformation of the economy to a greener and more inclusive one. One example is the United Nations Environment Programme — Finance Initiative (UNEP FI), originated in 1992. The UNEP incorporates with around 200 institutions in the global financial sector and together they work toward the goal of investing more social responsibly or even actively support the business that generates positive impact to the society. For instance, the investment areas such as renewable energy, sustainable housing, and healthcare that contribute positively to the society and the environment should be favored. On the other hand, people should reduce the number of investments made in the industries that are environmental damaging or toxic to human health; such as tobacco, alcohol as well as the non-renewable energy industry. In October 2015, the members of the UNEP FI released the Positive Impact Manifesto, which calls for a new financing paradigm that intends to set guidelines for financiers, investors and auditors together contributing to get a more sustainable society. However, it is more easily desired than achieved. The concept of impact investing is still fairly new to most investors and barely any higher business education institution puts serious attention on educating students on how to incorporate it into the traditional investing knowledge that ultimately only takes the maximization of profit into account. At least, as a student major in finance myself, I only came across impact investing in one investment portfolio theory lecture, and apparently, it was not considered desirable if you are a ‘rational’ investor. This is why I found this topic particularly important to address — we cannot disagree that business and capital markets can be a tremendous force for positive social change, yet (potential) investors and financiers are pretty uneducated or ignorant of how it can be done in practice. First of all, let’s define what are impact investments. The Global Impact Investing Network (GIIN) defined the term as “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.”. Therefore, there is a minor difference between impact investments and socially responsible investments in the sense that the former actively supported companies that possess explicit intent to have a social impact via their business model, while the later passively avoid investing in industries that create negative social impacts. Some may view impact investments as a grant instead of an “actual” investments —well, it also has a range of expected risk-adjusted return, and there is something more than just monetary return: the actual social impact that your investment creates. It, therefore, required the investors to think along three dimensions: return, impact, and risk. Getting your arms around all three variables simultaneously is challenging. As an impact investor, you must answer critical questions on how much financial return you expect, how much social impact you seek and how much risk you will accept in the pursuit of financial and social return. It is not impossible to obtain a satisfying amount of return and contribute positively to the society at the same time. With a set of criteria in mind of what your goals are as an impact investor and then filtered out the financial products and focused sectors that best fitted you. There are private funds for institutional investors, for example, Equilibrium Capital is a fund that pursues the strategy that targeting investments with sustainable business models with an intrinsic focus on a product or service that delivers social impact. If the businesses succeed they can deliver financial and social returns at scale. There is also a wide range of financial security for you to pick from as an individual investor, most of them are fairly liquid and can be traded just like any other stocks. There are some examples: SerenityShares Investments’ impact ETF is now trading on NYSE, iShares Sustainable MSCI Global Impact ETF (MPCT) that tracks the newly constructed MSCI ACWI Sustainable Impact Index which aimed to invest in companies that obtain the majority of their revenue from easing major world’s environmental/social challenges such as energy efficiency, sustainable water, sanitation, nutrition, and education. If you want to focus specifically on certain issues, there are also ETFs such as gender diversity index ETF, low carbon target ETF, clean energy ETF etc.. Feeling bold and want to make a positive impact beyond your portfolio after reading this article? Do your research and give impact investing a try!