VOLUME 32 NUMBER 4 FALL 2020 Journal of APPLIED CORPORATE FINANCE IN THIS ISSUE: 8 Rethinking Macro Measurement Public James Sweeney, Chief Economist, Credit Suisse 17 The First Modern Financial Crises: The South Sea and Mississippi Finance and Bubbles in Historical Perspective Robert F. Bruner, University of Virginia; and Scott C. Miller, Yale University Central Banks 34 Convergence and Reversion: China’s Banking System at 70 Carl Walter 44 Apocalypse Averted: The COVID-Caused Liquidity Trap, Dodd-Frank, and the Fed Craig Pirrong, University of Houston 49 The Poverty of Monetarism Patrick Bolton, Columbia University 68 Columbia Business School Roundtable on Broken Models of Public Finance Panelists: Jared Bernstein, Center for Budget and Policy Priorities; and Paul Kazarian, Japonica Partners. Moderated by Shiva Rajgopal, Columbia University 82 Columbia Business School Roundtable on The Fed’s Response to the Global Financial Crisis—and Now the Pandemic Panelists: Frederic Mishkin and Patricia Mosser, Columbia University. Moderated by Kate Davidson, The Wall Street Journal 90 The Euro @ 20: How Economic and Financial “Asymmetries” Marred the Promise of the Single Currency George Alogoskoufis, Athens University of Economics and Business; and Laurent Jacque, Tufts University 105 The Benefits of Buying Distressed Assets Jean-Marie Meier, University of Texas at Dallas; and Henri Servaes, London Business School, CEPR, and ECGI 117 Using ESG to Enhance Fixed-Income Returns: The Case of Inherent Group Nikhil Mirchandani and Chelsea Rossetti, Inherent Group 127 The Economic (Not Literary) Offenses of Michael Lewis: The Case of The Big Short and the Global Financial Crisis Don Chew, Journal of Applied Corporate Finance VOLUME 32 NUMBER 4 FALL 2020 IN THIS ISSUE: Public Finance and Central Banks 2 A Message from the Editor 4 Executive Summaries 8 Rethinking Macro Measurement James Sweeney, Chief Economist, Credit Suisse 17 The First Modern Financial Crises: The South Sea and Mississippi Bubbles in Historical Perspective Robert F. Bruner, University of Virginia; and Scott C. Miller, Yale University 34 Convergence and Reversion: China’s Banking System at 70 Carl Walter 44 Apocalypse Averted: The COVID-Caused Liquidity Trap, Dodd-Frank, and the Fed Craig Pirrong, University of Houston 49 The Poverty of Monetarism Patrick Bolton, Columbia University 68 Columbia Business School Roundtable on Broken Models of Public Finance Panelists: Jared Bernstein, Center for Budget and Policy Priorities; and Paul Kazarian, Japonica Partners. Moderated by Shiva Rajgopal, Columbia University 82 Columbia Business School Roundtable on The Fed’s Response to the Global Financial Crisis—and Now the Pandemic Panelists: Frederic Mishkin and Patricia Mosser, Columbia University. Moderated by Kate Davidson, The Wall Street Journal 90 The Euro @ 20: How Economic and Financial “Asymmetries” Marred the Promise of the Single Currency George Alogoskoufis, Athens University of Economics and Business; and Laurent Jacque, Tufts University 105 The Benefits of Buying Distressed Assets Jean-Marie Meier, University of Texas at Dallas; and Henri Servaes, London Business School, CEPR, and ECGI 117 Using ESG to Enhance Fixed-Income Returns: The Case of Inherent Group Nikhil Mirchandani and Chelsea Rossetti, Inherent Group 127 The Economic (Not Literary) Offenses of Michael Lewis: The Case Theof Big Short and the Global Financial Crisis Don Chew, Journal of Applied Corporate Finance A MESSAGE FROM THE EDITOR n our lead article, “Rethinking Macro Measurement,” Credit Suisse’s chief econo- I mist James Sweeney says that “the prestige of our National Income Accounts has peaked.” But what does that mean, and why might it matter? by Don Chew For one thing, it suggests that the dismal Federal Open Market Committee meeting to national wealth: To what extent is the assessments of real U.S. GDP and wage in which Fed chair Alan Greenspan, when value of the goods and services produced growth that we’ve been hearing from pressed by future chair Janet Yellen to by U.S. companies rising faster than the most economists for the past three or four define his policy goal of “price stability,” cost of the inputs, including investor decades should be taken with not just a responds, “zero percent inflation, when capital, used to produce such goods? grain, but maybe “truckloads” of salt—a properly measured.” Then, after Yellen One major limitation of the national precaution about putting too much faith cites the well-known imprecision of the accounts in answering this question is in macro data that Jared Bernstein, Joe inflation measurement process as grounds that our estimates of both GDP and Biden’s economic adviser, also issues in for the continued use of the standard 2% inflation are based mostly on trans- these pages. Such conventional macro inflation target, Greenspan shrugs and actions—and so they reflect only the statistics, and the media who report them says, “Let’s leave it at that, and move on.” dollar amounts paid and received. The as holy writ, are invariably wielded by Consistent with, and no doubt values of goods or services bartered or both political parties—Trump’s campaign informing, this exchange, studies like the provided gratis, or at prices significantly in 2016 no less than Biden’s today—as Boskin Commission’s in the mid-1990s below what consumers presumably grounds for hand-wringing over calam- reported an upward bias of 100-150 would or might pay for them, go largely itous and irreversible drops in U.S. basis points in the annual CPI estimates unrecorded in GDP or inflation. productivity and standards of living. during the ’80s and ’90s. And it’s not What this means, then, is that But in the meantime, it’s been hard just the failure of the CPI to track things nominal GDP and wage growth measures to avoid noticing that U.S. stock markets like consumers’ tendency to find cheaper may provide reasonably reliable indicators have continued to rise throughout those substitutes in response to price hikes. More of aggregate spending on final goods and decades, with a few setbacks to be sure, important—and far more troubling when services. But in the case of real measures, even reaching new highs in the midst of measuring productivity—is the inability of the systematic overstatement of U.S. a pandemic. So, what gives? How can macro stats to account for changes in the inflation and failure to reflect increases markets keep pushing higher when GDP, “quality” of goods and services. If a good in quality (and gains in consumer job growth, and other “fundamentals” are you bought last year is in most respects surplus) have not only exaggerated the all down and on their backs, and many twice as effective in meeting your “wants extent of slowdowns, but may have companies now find themselves unable and needs” as the one you bought five prevented us from seeing actual increases or unwilling to provide guidance? years ago for half the price, then its infla- in productivity and—who knows, maybe A big part of the answer, as Sweeney tion would in fact be the zero percent that even—wages in recent decades. suggests, has to do with the limitations of Greenspan professed to be aiming for. All this raises the tantalizing possibility conventional macro measures in capturing But if reliance on national income that such increases have a lot to do with the two critically important determinants of accounts has likely led for years to a stock price gains of the past four decades. both economic growth and stock prices: significant overstatement of inflation, it And although the author of our lead article inflation and productivity. And let’s start has almost certainly resulted in a much cautions firmly against taking this idea too with inflation: How and what do we really larger, and more misleading, understate- far, I feel compelled to cite James’s own know about how much the prices of the ment of productivity. And the question favorite illustration—not mentioned in representative consumer’s basket of goods that productivity measures purport to the article—of increases in the quality and services change each year? answer is especially important—indeed, of life, Google’s Waze app, whose traffic- To answer this question, Sweeney for many economists from Adam Smith management benefits go unrecorded in the starts with an amusing account of a 1996 on, it is the most important of all, the key national accounts. What he does confide 2 Journal of Applied Corporate Finance • Volume 32 Number 4 Fall 2020 in his article, though, is probably more early 18th-century expansion of global at the government’s role in the collapse telling: “In my meetings with CEOs, my trade and financial innovation, includ- of the Mississippi Company led to the suggestion of a productivity slowdown in ing the emergence of stock markets and abandonment of modern financial insti- corporate America almost invariably gets other financial institutions. Although still tutions and practices for nearly a century, laughed out of the room.” very much under government control and to a virulence of anti-market senti- But along with the failure of macro (if not ownership), such institutions are ment that continues to be recognized as statistics to reflect real productivity gains, recognized as the beginnings of the democ- distinctively French. there is at least one other explanation of ratization of finance and socialization of What’s more, when viewed side by the U.S. stock market’s resilience worth risk that are now well-established features side,