The Economist - UK (2019-06-29)

The EconomistJune 29th 2019 Finance & economics 73

E

conomicsisthestudyofhowsociet-

iesallocatescarceresources.Butwhy

leteggheadshaveallthefun?A museum

aimingtobringthedisciplinetothe

massesopenedinParisonJune14th.A

visittoCitécooffersbothseasonedand

neophytedismalscientistsa chanceto

reflectonthefield’simportance.

Plentyofcentralbanksrunmuseums

ofcoinsandbanknotes.TheBanquede

France,lookingtorepurposea branch

closedin2006,hadhigherambitions.It

aimsto“reconciletheFrenchwitheco-

nomics”,asif a lovers’tiffhaddriven

themapart.Thatit ishousedina neo-

gothicmansion,completewitha moat

defendingwhatusedtobeitsunder-

groundvault,addstothemystique.

Butit turnsoutthereisa reasonwhy

onlyoneothereconomicsmuseum

exists(inMexicoCity).Thoughbooksin

the“Freakonomics”mouldhavepitched

economicsasanendeavourthatgoes

beyondgdpestimatesandinflation

targeting,bringingit tolifeishard.Barbs

thateconomicsisbutthe“painfulelab-

orationoftheobvious”willresonate

withvisitorstraipsingthroughgallery

aftergalleryrunningthegamutofeco-

nomicactors,fromfirmstoconsumers

andgovernments.ExhibitsontheBasel

Committeeandtarget2paymentswill

straintoexcitethehordesofschool

pupilsCitécoaimstoattract.

Frenchstatistbiasesareondisplay:

thestockmarketispresentedaslittle

morethana glorifiedcasino.Butthe

privatesectorisalsocelebrated.The

curatorsarekeeneronglobalisationthan

are most French policymakers, cheering

global trade’s ability to boost incomes

across the world.

Does trade create domestic winners

and losers, exacerbating inequality? On

this, and just about anything conten-

tious, Citéco is frustratingly silent. Per-

haps its biggest shortcoming is its tech-

nocrat’s vision. There is only the vaguest

sense that economists and policymakers

do not all agree. The biases and political

framing that define economics in real

life are set aside rather than taken on.

The juiciest debates are absent.

But it does not dumb down compli-

cated subjects. An explainer on how

money is created by commercial banks

issuing loans goes beyond the simplifi-

cations of most textbooks. A game that

allows players to set what they think is

the correct interest rate is fun (try to visit

before Jens Weidmann, a hawkish Ger-

man in the running to lead the European

Central Bank, pulls the lever out of the

wall). A photo booth that prints bank-

notes with visitors’ faces in a watermark

is a witty prompt to ponder what it is that

makes currency worth its face value.

But presenting economics as a settled

discipline allowing for a dispassionate

display of its various facets, as Citéco

tries to do, turns out to be beyond the wit

of homo economicus. There is too much

for a mere building, no matter how

grand. Perhaps the best reason to visit is

the impression it conveys that econom-

ics might not belong in a museum at all.

Museumpiece

Citéco

PARIS

Displaysdedicatedtotheexpositionof economics offer marginal returns

Not from the benevolence of the curator

able price should the need arise. In theory,

that might result in the fund being unable

to repay its own customers immediately,

should many of them demand the on-the-

spot access they had been promised.

Investors took fright. It hardly helped

that the illiquid bonds in question (worth

€1.4bn, or $1.6bn, out of about €30bn in as-

sets under management) were issued by a

slew of companies connected to Lars

Windhorst, a flamboyant German finan-

cier famed for past blow-ups. Assets man-

aged by h2omelted faster than an ice cube

in a heatwave, down over €5bn as investors

headed for the exit. Shares in Natixis, a

French bank that owns half of h2o, fell 12%

on June 20th after Morningstar, a fund-

research adviser, raised its own concerns.

Banks usually benefit from central

banks acting as lenders of last resort if large

numbers of depositors suddenly demand

their money back. Not so fund managers.

Their mismatches used not to matter

much. Funds like h2omostly invested in

mainstream bonds and shares, for which

sufficient buyers could be found in a pinch.

But the past decade’s low interest rates

have seen fund managers take on greater

risk, in more obscure corners of finance.

Investing in less liquid securities boosts

returns—and management fees.

h2o is not the first to be caught out. Last

summer gam, a Swiss fund manager, sus-

pended a star trader who had loaded up on

esoteric paper. Its shares have since lost

over 60% of their value. Neil Woodford,

once a star stockpicker, ran into similar

trouble earlier this month. When the big-

company shares he was famed for invest-

ing in started to offer ho-hum returns, he

turned to taking stakes in small unlisted

companies. These stakes are far trickier to

unload in a hurry. But investors were still

entitled to money back on demand.

Or not. gam and Woodford had to “gate”

their clients’ money as client redemptions

threatened to overwhelm their ability to

generate cash by selling their funds’ assets.

That annoyed investors, but helped ensure

the funds are not forced to sell illiquid as-

sets at fire-sale prices. h2o’s funds include

provisions whereby investors pulling their

money amid a wider outflow have to accept

a small discount. So far it has proved capa-

ble of meeting hefty redemptions.

There are other reasons to worry about

liquidity in the bond market. Investment

banks that match buyers and sellers of se-

curities used to grease the system by hold-

ing troves of bonds on their own balance-

sheets. Rules curtailing that practice since

the financial crisis may have worsened li-

quidity mismatches elsewhere. Regulators

seem aware of the problem. On June 26th

Mark Carney, the Bank of England’s gover-

nor, denounced funds promising daily re-

demptions while investing in hard-to-shift

paper as “built on a lie”. Too true. 7

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