Knowledge that Transforms

Like any course, the basic money and financial institutions course, or money and banking as it is more frequently designated, takes on the unique coloration of the instructor. However, this course appears to be so affected more than most other finance and economics courses at this level. This occurs because, although it is a second course, it is still a very broad course in design, and more importantly, because it encompasses the three approaches to the teaching of economics and finance–description, theory, and policy. Different instructors emphasize different aspects, at times, to the almost total exclusion of one or both of the other two. But, judging from the financial failure of textbooks that have attempted to focus on just one of these aspects, say, financial institutions or monetary economics, it appears that most instructors prefer the broader and more diffuse coverage. And so do I.

The challenge of leadership is to look beyond the current expansion to consider the long–term outlook for the U. S. economy. My good friend Paul W. McCracken once described this process as looking across the valley to see what is on the other side. His message was: “What will be different on the other side of the valley is far more relevant to business planning than the valley itself.” Such advice is particularly meaningful at this time because of the basic need for more stability in our economic policies.

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An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

There is still a great deal of doubt whether we can avoid a capital shortage as economic recovery proceeds. In the near term, one sign of an impending capital shortage will be the appearance of bottlenecks in the industrial sector of our economy. Presently the data on capacity and its utilization are seriously defective.The Federal Reserve Board, in order to remedy the deficiency of the data, is improving its series on utilization rates. The new series in general will show that we have substantially less unused capacity than indicated by the old series.My preliminary reading of the improved data, ne ertheless, is that we need not be greatly worried about major bottlenecks well into 1977.Thereafter, the pace of recovery will be a critical factor. If the economy expands very rapidly, we may not have time to put in place enough capacity to avoid shortages. A moderately paced recovery will give us more time to produce the plant and equipment.

No abstract.

To discuss what's right and wrong with the teaching of contemporary money-andbanking courses, we must first distinguish the various species of courses that fall under the M&B genus. In economics departments, the undergraduate M&B course is conceived prototypically in either of two ways: (1) as a basic macroeconomics course, including in principle (though often not in practice) an introductory swipe at international finance, or (2) as a policy course focusing on the art of central banking, including an obligatory introduction to opportunities for intervention in foreign-exchange markets. For convenience, let's call these alternative course conceptions (M&B)1 and (M&B)2, respectively. In business-school finance departments, M&B courses seek primarily to explain how contemporary financial markets and institutions work. These courses develop analytical descriptions of different types of financial transactions, instruments, transactors (with special emphasis on the roles played by intermediaries, dealers, and brokers), and contract terms (with special focus on implicit and explicit yields). Whereas MBA-level offerings are of negligible importance to the typical economics department, they represent a sizeable portion of the finance-department M&B market. Undergraduate M&B courses in finance departments–(M&B)3–differ from MBA-level ones–(M&B)–in assuming that students possess little background or interest in macroeconomic theory per se. (M&B)4 courses shape up as a linear combination of (M&B)3 and either or both (M&B)1 and (M&B)2.

In a recent article in this Journal, Amir Barnea [1] proposes a criterion for assessing the market-making efficiency of New York Stock Exchange specialists. The appealing aspects of Barnea's method are that it uses publicly available data (common stock prices) and operates on a variable of primary concern to investors, the variance of returns on common stock. The difficulty we see in applying his approach, however, is that Barnea's performance criterion can be sensitive to a number of factors in addition to any impact the specialist might have, and that effective specialist intervention might have either a positive or negative impact on the performance measure. Thus, his specialist ranking seems to be quite misleading, and his empirical findings appear to be amenable to a substantially different interpretation than that which he provides.