The release of Samsung’s boss leaves South Koreans exasperated

He backed the wrong horse

“INNOCENT if rich, guilty if poor” is a well-known adage in South Korea. It has been trending anew on social media since February 5th, when Lee Jae-yong, the vice-chairman of Samsung Electronics, was released from prison. The 49-year-old heir to South Korea’s biggest chaebol, or family-run conglomerate, had been found guilty of bribing a former president, Park Geun-hye, and her confidante, Choi Soon-sil. But Mr Lee’s initial five-year prison sentence was cut in half and suspended by an appeals court, allowing him to walk free after 353 days in jail. Other executives were also released on suspended sentences.

The ruling largely upheld Mr Lee’s insistence that he had been coerced by Ms Park into handing over the bribe. Prosecutors had charged him with paying 43bn won ($38m), which included buying horses for Ms Choi’s daughter and various donations to her sports foundations. In the end, only use of the horses was recognised as bribery, slashing the sum to 3.6bn won. Although Mr Lee...Continue reading

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The markets deliver a shock to complacent investors

Central banks should gamble on productivity-improving technology

IN 1996 Alan Greenspan began asking why the flashy information technology spreading across America seemed not to be lifting productivity. He was not the first to wonder. A decade earlier Robert Solow, a Nobel prizewinner, famously remarked that computers were everywhere but in the statistics. But Mr Greenspan was uniquely positioned, as the chairman of the Federal Reserve, to experiment on the American economy. As the unemployment rate dropped to levels that might normally trigger a phalanx of interest-rate rises, Mr Greenspan’s Fed moved cautiously, betting that efficiencies from new IT would keep price pressures in check. The result was the longest period of rapid growth since the early 1960s. Despite his success, few central bankers seem eager to repeat the experiment and many remain blinkered to issues other than inflation and employment. That is unfortunate. A little faith in technology could go a long way.

Central bankers are not known to be a visionary bunch. Turning new ideas into more...Continue reading

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Bets on low market volatility went spectacularly wrong

THE Cboe Volatility Index, or Vix, known as the “fear gauge”, spikes when markets are most jittery. When Sandy Rattray, now at Man Group, an asset manager, worked on the Vix in the early 2000s, he and his team considered launching an exchange-traded product (ETP) linked to it, but concluded that it would be a “horror show” because of poor returns. Now, however, Vix-linked ETPs are a big industry, with around $8bn in assets. Formerly niche investments, they served vastly to exacerbate this week’s market turmoil, which saw the Vix’s largest ever one-day move, when it more than doubled on February 5th.

The Vix was always intended as a basis for financial products as well as a gauge. Vix futures were launched in 2004 and options in 2006. “Long” Vix products, which Mr Rattray looked into, seek to mirror the index . The problem is that this means buying futures contracts, with buyers having to pay a constant premium over spot prices. So these ETPs tend to lose money over time, punctuated (but not fully made up for) by gains when the Vix spikes. The largest “long” fund, VXX, issued by Barclays, has lost over 99.9% since its launch in 2009.

So other ETPs were developed to “short”—ie, bet against—the Vix index. Until this week, they were doing handsomely. Amid a long spell of subdued volatility, investors piled in. In January, assets in...Continue reading

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How to interpret a market plunge

FOR much of the past two years, market watchers have had little to write about, apart from the passing of one stock-index milestone after another. The events of the past week, however, have shaken the financial world awake. A recent, upward zag in bond yields seemed to signal the arrival of a new theme in market movements. Stock prices confirmed it, and then some. Over the past week, American stocks have dropped about 7%, punctuated by a breathtaking, record-setting plunge on Monday. The Dow Jones stock index recorded its largest ever one-day drop, of more than 1,000 points. In percentage terms the decline, of more than 4%, was the biggest since 2011.

The swoon set tongues to wagging, about its cause and likely effect. There can be no knowing about the former. Markets may have worried that rising wages would crimp profits or trigger a faster pace of growth-squelching interest-rate increases, but a butterfly flapping its wings in Indonesia might just as well be to blame. There is little more certainty regarding the latter. Commentators have...Continue reading

from Business and finance http://www.economist.com/blogs/freeexchange/2018/02/crash-course?fsrc=rss
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Why United Airlines has got into a flap over a peacock

FEDERAL guidelines in America stipulate that airlines must allow passengers with disabilities to bring support animals onto flights. The rules were originally designed with guide dogs for the blind and the like in mind. Yet in recent years the rules have allowed a host of unusual and exotic animals to board planes for their owners’ emotional wellbeing.

Last weekend United Airlines, America’s third-largest carrier, drew the line at a peacock. A woman arrived at Newark International Airport and attempted to board her flight with the large bird, which she claimed was an emotional-support animal. The Jet Set, a travel show, captured images of the bird as it was denied boarding (see picture). The airline told the Washington Post that the peacock “did not meet guidelines for a number of reasons, including its weight and size” and that “we explained this to the customer on three separate occasions before they arrived at the airport.”

Service animals, including emotional-support animals, can generally fly for free. As...Continue reading

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Why sub-zero interest rates are neither unfair nor unnatural

DENMARK’S Maritime Museum in Elsinore includes one particularly unappetising exhibit: the world’s oldest ship’s biscuit, from a voyage in 1852. Known as hardtack, such biscuits were prized for their long shelf lives, making them a vital source of sustenance for sailors far from shore. They were also appreciated by a great economist, Irving Fisher, as a useful economic metaphor.

Imagine, Fisher wrote in “The Theory of Interest” in 1930, a group of sailors shipwrecked on a barren island with only their stores of hardtack to sustain them. On what terms would sailors borrow and lend biscuits among themselves? In this forlorn economy, what rate of interest would prevail?

One might think the answer depends on the character of the unfortunate sailors. Interest, in many people’s minds, is a reward for deferring gratification. That is one reason why low interest rates are widely perceived as unjust. If an abstemious sailor were prepared to lend a biscuit to his crewmate rather than...Continue reading

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