Category Archive for: Regulation [Return to Main]

Tuesday, November 29, 2016

Currency Authority Proposes Ban on Bank Investments in Commercial Metals

Jayme Wiebold at Regblog:

Currency Authority Proposes Ban on Bank Investments in Commercial Metals: In addition to typical banking activities such as issuing home loans and administering savings accounts, should your neighborhood bank be able to buy and trade metals like copper and gold? Presently, financial institutions can legally participate in commodities markets—which include trading in these precious metals—creating a state of affairs that some regulators and politicians say may increase commodities prices for consumers and create financial instability. ...
The Office of the Comptroller of the Currency, which regulates and supervises national banks and federal savings associations, recently ... proposed [a] rule that would prohibit banking institutions from buying or selling metals including copper, aluminum, and gold. ...
Designating dealing in certain commercial metals as an out-of-bounds activity for commercial banks marks a reversal of position for the Currency Comptroller. It previously issued an interpretive letter stating that national banks could buy and sell copper—an industrial metal—because such trading was functionally equivalent to trading in precious metals like gold—an activity considered within the “business of banking.”
As indicated by the proposed rule, the Comptroller no longer believes that investing in copper markets is principally the same as dealing with coins made from precious metal or other types of gold. ...
The Comptroller’s proposed rule comes on the heels of a report it co-authored with the Federal Reserve and Federal Deposit Insurance Corporation, which contains several recommendations to ensure the separation of traditional banking activities from more commercial activities. The report specifically states that the Comptroller would publish a proposed rule about limits on trading copper.
In the report, the Federal Reserve also recommends several other reforms that aim to “help ensure the separation of banking and commerce.” It proposes repealing a rule that allows bank holding companies to participate in commodities activities similar to those addressed by the Comptroller’s proposed rule for national banks and recommends strengthening standards for other commodity-related activities like trading derivatives. The report’s authors also recommend repealing authority for financial holding companies to participate in merchant banking activities like buying a stake of ownership in a company instead of providing a traditional loan.
The Comptroller’s proposed rule is part of a growing trend of regulatory and political pressure to separate traditional banking activity from commercial activity. ...

Tuesday, November 01, 2016

Is the Obamacare Problem a Public or a Private Problem?

Jared Bernstein:

Is the Obamacare problem a public or a private problem?: My WSJ greets me on the front stoop this AM with the banner headline on the “Depth of Health Law Woes,” based on the rise of “thin” markets with too few private insurers to generate cost-saving competition. ...
First, while the Journal article is surely informative, it violates my rule #1 in this space: when writing about private exchanges, declare up front that we’re talking about 7 percent of the population. That’s the share that get coverage through the ... the exchanges. ...
Those shares don’t negate the thin market problem at all, but they do give it essential context. Most people still get their coverage through their employer (about 50 percent) and Medicare or Medicaid (34 percent).
But my question today is whether this spate of articles is accurately framing this problem. That is, diminished competition among insurers in various markets is invariably framed as an architectural flaw in Obamacare, and thus, a government failure. But it could just as easily be seen as market failure, or more specifically, a pricing-calibration problem. If so, the problem isn’t too much government intervention; it’s too little.
The theory of the case when the law was being crafted was, for both policy and political reasons—the latter being buy-in from private insurers, whose powerful lobby couldn’t be ignored—that the exchanges would be populated by private insurers competing for customers in the (relatively small!) non-group market.
The insurers would get a bunch more customers, most of whom would come to the table with a tax credit to help pay the cost of their subsidy, a non-trivial deal sweetener for the private insurers (not to mention the mandate, further nudging customers into the exchanges). In return, they’d have to accept a set of rules designed to promote adequate coverage, like accepting applicants with pre-existing conditions and “community rating:” no price discrimination based on health status.
At the time, there was a robust argument about the wisdom of this path. While it was the least disruptive to a major industry, the long history of the uneasy relationship between health care and markets, along with the experience of other advanced economies, led many to worry that private insurers could not be depended on to meet the demands of a newly regulated individual market. They had an incentive, for example, to set their initial prices too low to get customers, which would mean actuarial losses and a big jump in premiums (one solution was to add a program to limit losses to such insurers: the so-called “risk corridors”).
This was partially the motivation for adding a public option, but the politics blocked that option (some will argue that the administration, of which I was then a member, didn’t push hard enough; I’d argue the votes just weren’t there). The private folks didn’t want to compete with anything like Medicare, which consistently posts lower price growth than the privates—it is non-profit, after all—and their message was thus, “we got this.”
Well, it turns out they don’t got this, though again, this is less a failure in the structure of the program than growing pains as insurers learn to price their products based on the health of those coming into the exchanges. If there’s a structural flaw in Obamacare, it’s that it doesn’t include the public option. Those of us who pulled for it had it right in that we saw the need for just such a backstop.
To be fair, a public option is itself a tricky bit of work, and it’s too easy to make it sound like a hand-wave, miracle solution (see Jacob Hacker’s excellent discussion of these issues here). But you know what else is a big, old hand wave?: the miracle of competition, allegedly solving everything that ails the health care market.
Obamacare is a public/private hybrid, and this recent episode with the 2017 premiums should teach us that dialing back the public side is not the way forward. To the contrary, the private sector never has and never will provide the health care Americans want and need on its own.

Thursday, October 27, 2016

It Takes a Village to Maintain a Dangerous Financial System: Q&A with Anat Admati

At ProMarket:

It Takes a Village to Maintain a Dangerous Financial System: Q&A with Anat Admati: Stanford professor Anat Admati discusses her new paper, in which she explains how a mix of distorted incentives, ignorance, confusion, and lack of accountability contributes to the persistence of a dangerous and poorly regulated financial system. ...

Tuesday, October 25, 2016

Evaluating Germany’s Success in Regulating High-Frequency Trading

Alex Walsh at Regblog:

Evaluating Germany’s Success in Regulating High-Frequency Trading: ...Although many countries have attempted to regulate the meteoric rise of high-frequency trading, no plan has been more ambitious than Germany’s High-Frequency Trading Act (HFT Act). Rather than regulate trading speed alone, the HFT Act targets the complex core of high-frequency trading: financial algorithms.
And there may be some evidence that the HFT Act is working—at least in part. In a recent paper, Nathan Coombs, a Research Fellow at the University of Edinburgh, grappled with the complexities of trying to define, identify, and monitor well-guarded financial algorithms, and concluded that the HFT Act—although far from perfect—has had a notable degree of success. ...

Friday, October 07, 2016

The Anti-Trust Election

I have a new column:

The Anti-Trust Election of 2016: A report on the “Benefits of Competition and Indicators of Market Power” from the White House Council of Economic Advisors documents that monopoly power has been increasing the last few decades, and it argues persuasively “that consumers and workers would benefit from additional policy actions by the government to promote competition within a variety of industries.” The report is part of an initiative by the Obama administration last spring to promote a “fair, efficient, and competitive marketplace” through stricter enforcement of antitrust regulations, and through other measures such as patent reform and the reform of occupational licensing. 

To those who believe more aggressive enforcement of antitrust laws is needed, and I am one of them, Hillary Clinton’s recent announcement of “A new commitment to promote competition, address excessive concentration and the abuse of economic power, and strengthen antitrust laws and enforcement” is an encouraging sign that if Clinton is elected the Obama administration’s initiative will not end when he leaves office. 

The presence of monopoly power harms the economy in several ways. ...

Donald Trump has promised to make deregulation one of the focal points of his presidency. If Trump is elected, the trend toward rising market concentration and all of the problems that come with it are likely to continue. We’ll hear the usual arguments about ineffective government and the magic of markets to justify ignoring the problem. If Clinton is elected, it’s unlikely that her administration would be active enough in antitrust enforcement for my taste. But at least she acknowledges that something needs to be done about this growing problem, and any movement toward more aggressive enforcement of antitrust regulation would be more than welcome.

Wednesday, September 14, 2016

American Antitrust Is Having a Moment: Some Reactions to Commissioner Ohlhausen’s Recent Views

Chris Sagers at ProMarket:

American Antitrust Is Having a Moment: Some Reactions to Commissioner Ohlhausen’s Recent Views: Over the summer, Federal Trade Commissioner Maureen Ohlhausen took me and several others to task in a speech, subsequently published as a journal article... The theme we’d all written about is whether we in the United States have a “monopoly problem,” and whether federal policy should try to do something about it. ...

Commissioner Ohlhausen had some pretty strong words. ... Specifically, she implies a very strong presumption against public interference in private markets, as indicated by her argument that there is not yet sufficient evidence that we have a monopoly problem. The argument seems to be that we must wait until we are very, very sure, beyond any reasonable econometric doubt, apparently, that there’s something wrong before we step in. ...
She is mistaken, and she ignores roughly a library-full of well-known..., sophisticated empirical work. ...
In the end, the irony of these remarks is captured in this point: Commissioner Ohlhausen is pretty witheringly dismissive of a certain kind of evidence of market power, and implies that it would not support increased enforcement unless it can overcome a high methodological bar. But for her own countervailing evidence that in fact American markets are “fierce[ly] competiti[ve],” she says this:  “Consider the new economy, which is a hotbed of technological innovation. That environment does not strike me as one lacking competition.”
In other words, the presumption against antitrust is so strong that evidence of harm must meet the most exacting standards of social science. To prove that markets are in fact competitive, however, needs nothing more than seat-of-the-pants anecdotes. Again, I mean no disrespect, and I think we have an honest difference of opinion. But this stance is not social science, and it is not good, empirically founded public policy. It is just ideology. ...
It’s definitely true that the agencies have brought a bunch of challenges to a bunch of nasty mergers, and perhaps total enforcement numbers have gone up a bit. But that is because we are in the midst of a merger wave in which parties have been proposing breathtakingly massive, overwhelmingly consolidating horizontal deals. While there is a track record to be proud of in the administration’s enforcement, especially, as the commissioner observes, in the Commission’s campaign against hospital mergers, reverse-payment deals, SEP problems, and patent trolls, and who knows how many other matters, the fact remains that by and large the administration has mostly not taken action that any administration would not have taken, including the Reagan and both Bush administrations. ...

Tuesday, August 23, 2016

It’s Time to Bring More Realistic Models of Human Behavior into Economic Policy and Regulation

David Halpern at Bank Underground:

It’s time to bring more realistic models of human behaviour into economic policy and regulation: The Centre for Central Banking Studies recently hosted their annual Chief Economists Workshop, whose theme was “What can policymakers learn from other disciplines”.  In this guest post, one of the keynote speakers at the event, David Halpern, CEO of the Behavioural Insights Team, argues that insights from behavior science can improve the design and effectiveness of economic policy interventions.

Behavior science has had major impacts on policy in recent years. Introducing a more realistic model of human behavior – to replace the ‘rational’ utility-maximizer – has enabled policymakers to boost savings; increase tax payments; encourage healthier choices; reduce energy consumption; boost educational attendance; reduce crime; and increase charitable giving. But there remain important areas where its potential has yet to be realized, including macroeconomic policy and large areas of regulatory practice. Businesses, consumers, and even regulators are subject to similar systematic biases to other humans. These include overconfidence; being overly influenced by what others are doing; and being influenced by irrelevant information. The good news is that behavioral science offers the prospect of helping regulators address some of their most pressing issues. This includes: anticipating and addressing ‘animal spirits’ that drive bubbles or sentiment-driven slowdowns; reducing corrupt market practices; and encouraging financial products that are comprehensible to humans. ...[continue]...

Thursday, July 28, 2016

What Does 'Regulatory Capture' Mean to Business and the Economy?

James Ledbetter:

What Does 'Regulatory Capture' Mean to Business and the Economy?: In recent months, the idea of "regulatory capture" ... has been enjoying its star turn. ... Earlier this year, the Government Accountability Office revealed that it had (at the urging of two members of Congress) begun investigating whether the New York office of the Federal Reserve is too close to the financial institutions it is supposed to regulate. This is, apparently, the first GAO investigation of its kind. ...
For all the ubiquity of charges of capture, however, it can be difficult to grasp exactly what capture is, or how serious a social and economic problem it represents.
As it is commonly used, "capture" seems malleable enough to fit into the worldviews of both the left (evil corporations outfox, outspend, and manipulate regulators) and the right (state regulation is harmful to businesses). And yet, historically, capture theory embodies a more collusive view of the relationship between government and enterprise. Classic capturists argue that ... businesses accept regulations because they ultimately help improve profits. ...
Intuitively, though, we know that not all regulation benefits companies. ...
Some scholars are urging that we rethink the entire idea. A 2013 essay by William Novak, a law professor at the University of Michigan, ... accepts that regulatory capture exists, but he offers two refinements... One is that capture may be more likely among "vertical" regulators--those who enforce rules within a single industry, such as trucking--than among "horizontal" regulators, those whose mandates apply broadly across society, such as the Environmental Protection Agency or the Occupational Safety and Health Administration.
The second is that ... it is far from proven that regulators are any more prone to it than other institutions. The financial crisis ... was a regulatory failure, to be sure. But, as Novak said in an interview, "entire sectors of the government became enamored with financial interests, including Congress."
And thus, if we intend to tackle the problem of capture, we need more precise definitions and measurements. There is a risk of either weakening regulations that genuinely protect the public, or allowing some incumbents to continue their unearned free ride and squash disrupters. ...

Tuesday, July 19, 2016

European Red Tape Is a Bogus Justification for Brexit

Simeon Djankov at PIIE:

European Red Tape Is a Bogus Justification for Brexit: Did the European Union’s ship of state run aground on misleading anecdotes? It would appear so. Red tape is frequently mentioned as one of the main reasons for Brexit. ...
But however much Brussels is reviled for burdensome regulations, especially in the conservative British press, it is primarily up to the national governments to regulate business and ensure that their regulation is competitive. In recent years, individual European countries have actually improved the environment for doing business. Half of the 25 countries in the world where it is easiest to do business are EU members, according to the 2016 World Bank’s Doing Business survey. These are Denmark (3), United Kingdom (6), Sweden (8), Finland (10), Germany (15), Estonia (16), Ireland (17), Lithuania (20), Austria (21), Latvia (22), Portugal (23), and Poland (25). Malta is the lowest-ranked EU country, at 80 (of 189 economies). ...
An examination of the EU’s record on regulations shows that in practice the EU governs few areas of business activity and that it has a lighter regulatory touch than many other parts of the world, including the United States. Yet the perception of bureaucratic Europe persists. ...

Sunday, July 03, 2016

Who Exactly Benefits from Too Big To Fail?

Chris Waller, research director at the St. Louis Fed (and a classmate in graduate school) argues that "TBTF status leads to a wealth transfer from new buyers to existing holders of the debt":

Who Exactly Benefits from Too Big To Fail?: Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, has revived discussion of the Too Big To Fail (TBTF) issue for large U.S. financial institutions. TBTF arises when the government and regulators fear that a bank’s failure would cause widespread damage to the financial system. Consequently, when a large bank or highly interconnected bank is on the verge of failure, the government steps in and prevents its collapse. When this happens, howls are heard that the government is “bailing out” equity and bond holders at taxpayer expense and that the proper action is to wipe them out.
Why is having a bank labeled TBTF a problem? First, by being viewed as TBTF, a bank receives an insurance policy against default from taxpayers but does not pay a premium for this insurance. Second, being provided with this insurance creates moral hazard since bank management can undertake riskier activities and reap the higher returns while shifting the risk of default to the taxpayer. Note that the first benefit occurs even if the bank does not change the risk structure of its balance sheet—e.g., even if it does not engage in moral hazard. Thus, it is important to keep in mind that having TBTF status is not just about moral hazard. It is also about the provision of free insurance to the bank by the taxpayer. This latter point is often overlooked in discussions of TBTF.
But, as heretical as it may sound, are the current equity holders and bank creditors the true beneficiaries of the bailout? The answer depends on whether or not the TBTF designation for a bank was accounted for in its equity and debt prices at an earlier date. If a bank is declared TBTF unexpectedly at the moment it is about to default, then equity and bond holders are bailed out since their asset positions did not price-in this status at the time of purchase.
However, what if the TBTF designation was given prior to default? Looking back at the financial crisis, this seems to be the more-relevant case. Ron Feldman and Gary Stern warned about banks having this designation in their 2004 book, Too Big to Fail: The Hazards of Bank Bailouts, and the risks it created for the U.S. taxpayer. They point out that the failure of Continental Illinois in 1984, the seventh largest bank in the U.S. at the time, and the government’s generous treatment of unsecured creditors brought TBTF front and center into the public policy arena. Feldman and Stern succinctly summarize the TBTF problem: “The roots of the TBTF problem lie in creditors’ expectations...and the source of the problem is a lack of credibility” that the government will let them fail. Thus, the problem with TBTF is that a bank is viewed this way long before it actually gets into trouble.
It is exactly this timing that makes it difficult to determine who benefits from TBTF. To make this scenario as stark as possible, suppose the government knows that its promises to let bank A fail are not credible. So the government simply announces at date t that bank A is too big to fail and will be bailed out if it is on the verge of default.
What will happen at the time of this announcement? Bank A’s equity price will increase to reflect the absence of default risk associated with this new designation. Fur­thermore, the price of the bank’s outstanding debt and its newly issued debt will increase to reflect the elimination of default risk.
So who benefits from this? Well, obviously those holding equity claims on bank A when the TBTF status is announced. They get a capital gain on their shares from the price appreciation. The same is true for those holding bank A debt—the higher price of bank A debt would generate a capital gain to the debt holders at the time of the announcement. This all happens even if the bank does not change the riskiness of its portfolio.1
But what about those who buy bank A stocks and bonds after the announcement? If financial markets are efficient, then the TBTF status should be fully capitalized into the value of the bank. As a result, a risk-neutral investor would be indifferent between (i) buying the stock at a low price without TBTF protection and (ii) buying the stock at a higher price but with TBTF status. In short, new buyers are paying for the TBTF insurance via higher equity and bond prices. They do not receive a windfall from the TBTF status assigned to bank A.
To illustrate with a simple example, suppose bank A has an outstanding simple discount bond at time t that matures in period t +1with face value of $1. Assume the probability of default is zero in period t but occurs with an exogenous probability π > 0 in t + 1. If default occurs, the bond holder gets zero. Since default is purely exogenous, moral hazard does not come into play. In the absence of TBTF status, the time t price of the bond that a risk-neutral investor would pay to acquire the bond is

where i is the discount rate used by all investors. Note that the bond price reflects the probability of default.
Now suppose that, at the beginning of period t, the government announces that bank A is too big to fail. Then the bond price will instantly jump to

 So the initial holder of the debt reaps a capital gain of

from selling his bond after the announcement. However, the new buyer has to pay a higher bond price to get this “insurance” from the government. Thus, the TBTF status leads to a wealth transfer from new buyers to existing holders of the debt. Note that the difference tpt is the fair market price for the insurance (the “premium”) that the existing bond holder would be willing to pay to avoid default. So, in short, the government provides the insurance but existing bondholders collect the premium from new buyers of the debt.2
A similar exercise can be done with equity pricing as well. Suppose the firm faces a constant and exogenous probability π of failing each period and pays a dividend d if it doesn’t fail and 0 otherwise. Using a simple present discounted value formula applied to the dividend stream yields the equity share price

Once the bank is declared TBTF, default goes to zero and the equity price jumps to3

which yields a capital gain of

But what about the buyers of bank A equity after the announcement? As we can see, they paid a much higher equity price in response. Again, they are paying for the default protection.4 The equity holders at the time of the announcement are the ones who reap the rewards of the TBTF status.
Now suppose the government chose to let bank A fail after this announcement and wiped out the equity holders and creditors. Well, the initial bondholders would not care. They received the insurance premium and sold the bond. They do not suffer. However, those who bought the bond at price t “paid” for insurance but did not get the promised payoff. They actually lose.5 Hence, it is not surprising that they would be upset by the government’s action. Who wouldn’t be upset after paying for insurance that didn’t pay off when it should have?6
A similar argument applies to equity holders. The initial stock holders wouldn’t care. They reaped their capital gains by selling their shares to new buyers. But a shareholder who bought shares at êt would again argue that they paid for the default protection. They would not be happy if they are told it’s “fair” that they should be wiped out ex post. If someone held a share of bank A stock prior to the time of the announcement until the government allowed them to fail, then they would receive no capital gain and would be wiped out appropriately since they paid et not êt. This seems to be the view of those opposed to bailing out equity holders: that those holding equity at the time of bank A’s failure were the same ones holding equity when the TBTF status was announced.
Moral hazard is a separate issue and an important one. But a similar logic applies. Bond holders care only about the default insurance. They do not reap the additional earnings from the riskier portfolio. Suppose the government sold a credit default swap (CDS) to potential buyers of bank A’s debt. They would be willing to pay t > 0 for the CDS and nothing more. Is this enough to compensate the government for taking on this risk? Most likely not, since under moral hazard the risk of default increases, say, to π̄ > π. But this is not the new bondholders’ problem. It’s a problem between the government and the equity owners.
For equity holders, moral hazard would imply bank management undertakes actions such that π̄ > π and > d. If markets could properly assess this behavior in pricing bank A’s changed risk structure, then the equity price would be

which reflects the fact that the shareholders reap the higher dividend stream but the government absorbs the downside risk since π̂does not appear. As before, a new buyer of equity is paying for (i) the default protection and (ii) the higher dividend stream arising from moral hazard. So, yes, they receive the benefits of moral hazard in the form of higher dividend payments but they paid for it via the price they paid to acquire the stock. The problem once again is that the government absorbs the downside risk but isn’t compensated for it by the equity holders at the time of the announcement. How severe the moral hazard problem is depends on its quantitative importance. And research is only now beginning to explore this.7
To summarize, the value of being designated TBTF is capitalized into the price of a firm’s equities and its bonds. TBTF provides a windfall capital gain to shareholders and creditors at the time of the designation. But after that, new buyers of equities and debt are paying for that status. Con­sequently, determining who gets “bailed out” when an institution is TBTF is a more complicated task than it appears.
If the government is unable to commit to letting banks fail or breaking them up is not a serious option, then the best that can be done is compensate taxpayers for the default insurance it provides to large financial institutions. Minneapolis Fed President Kashkari has advocated turning the banks into financial public utilities and regulating them accordingly. An alternative may be to have the government sell CDSs against the debt of large financial institutions. Debt holders would then pay the government directly for this insurance. Having the U.S. government sell insurance is already a common policy: The U.S. government currently sells crop insurance, flood insurance, disability insurance, etc. So it is not unprecedented. While this may not solve the moral hazard problem, it at least compensates taxpayers for providing default insurance.
Notes
1 The same logic applies to stock options of senior management. If the announcement of TBTF causes the equity price to jump high enough, then the strike price is below the market price of the stock, meaning senior executives are “in the money” and get a capital gain from their stock options.
2 Another way to think about this is to assume the government issues a credit default swap. If it sold the CDS on the market it would receive the premium tpt from the buyer of the CDS. If default does not occur, the taxpayer makes a profit from the CDS; if default does occur, the taxpayer is on the hook for the loss. Now suppose the government gives the CDS to the existing bondholders and lets them sell it. The current bondholders get the premium as a windfall profit without absorbing any risk. Meanwhile, the taxpayer gets zero if no default occurs and is on the hook for $1 if default occurs. The buyer of the CDS is not bailed out—he paid the fair market price for the insurance.
3 Since bond financing costs are lower, this would allow for a higher dividend payment after TBTF status is announced. Nevertheless, this is priced-in for new buyers of the equity.
4 Again, senior managers who join bank A after the TBTF designation now face a higher strike price for their stock options, which effectively lowers their executive compensation.
5 This applies even if the government could credibly remove the TBTF status of bank A.
6 This line of reasoning also applies to many situations. For example, consider the mortgage interest rate deduction. Many argue that it is a subsidy to homeowners and should be eliminated. However, the deduction has now been capitalized into the price of the house so a new owner would actually take a capital loss if the deduction was removed. Again, new homeowners have paid for the subsidy and get very angry when elimination of the mortgage interest deduction is discussed.
7 See Javier Bianchi’s “Efficient Bailouts” (forthcoming in American Economic Review; https://www.minneapolisfed.org/research/wp/wp730.pdf) for an excellent attempt at quantifying the moral hazard problem in banking. Bianchi’s main finding is that moral hazard is not quantitatively important if bailouts are systematic as opposed to being focused on a particular bank.

Tuesday, June 21, 2016

(Not) Prosecuting Financial Crimes

From Penn Law's RegBlog

(Not) Prosecuting Financial Crimes, by Brandon L. Garrett: It is sobering that discussions about regulatory capture now include the subject of criminal prosecutions. ... That the public is increasingly demanding greater accountability for corporate crimes is a positive development. Take the case of HSBC. The former head of compliance at HSBC announced his resignation at a July 17, 2012 hearing before the U.S. Senate’s Permanent Subcommittee on Investigations. ....
The Subcommittee’s remarkable investigation described not just a weak anti-money laundering program at the multi-national bank, but billions of dollars diverted to Mexican drug cartels, groups linked to terrorism, sanctioned regimes, and others. The scale of the violations was shocking. Prosecutors described concerted efforts to hide dirty money transactions...
The bank was not convicted of any crime..., no employees or officers were prosecuted. At the time, then-Assistant Attorney General Lanny Breuer explained: “Our goal here is not to bring HSBC down, it’s not to cause a systemic effect on the economy, it’s not for people to lose thousands of jobs.” ...Prominent cries of “too big to jail” greeted the agreement. ...
Companies cannot literally be put in jail, of course. And that is why adequately holding them accountable for crimes is so important. Responsible officers and employees can be targeted. ... Yet many companies pay no fine, and even the biggest payments are often greatly discounted. It is not the case that more companies are being prosecuted each year; on the contrary, fewer and fewer are. ...
On the topic of individual defendants: in recent years, almost two-thirds of corporate prosecutions have not been accompanied by any charges filed against employees..., and most who have been were not high-up officers of the companies, but rather were middle managers of one kind or another.  
Will this change? The U.S. Department of Justice has announced a set of recent changes aimed at increasing the focus on individual investigations. Yet there has not yet been any observable change in the charging data regarding individuals. ...  Perhaps more resources for corporate investigations, and a sea change in priorities, are needed to end “too big to jail” once and for all.

Monday, June 20, 2016

Blinder's 'Financial Entropy Theorem'

This is from the introduction to an interview of Alan Blinder:

Alan Blinder on Over-Regulating Financial Markets: ...Professor Alan Blinder, former Vice Chairman of the Federal Reserve (June 1994 to January 1996), has been studying the financial system for close to 30 years. In 2014 he published a paper that did not get enough attention, but that students of regulation theory may find surprising: In order to get optimal regulation in the financial world, one should seek to over-regulate.7)
The idea of cyclical regulatory equilibrium in financial markets is not new, as Blinder immediately admits. In a 2009 paper, Joshua Aizenman wrote that “prudential” under-regulation may expose economies to future financial crises, which means that over-regulation may be the correct course8).  And, of course, Blinder also borrows from the “Minsky cycle”: Hyman Minsky’s idea that periods of financial stability encourage further and further risk-taking, even with borrowed money, until a phase–a “Minsky moment”–where asset values collapse.
“Financial regulations and their effectiveness tend to get weakened over time by (a) industry workarounds, (b) regulatory changes, and (c) legislative changes. The main exceptions come during and after financial crises or scandals, when public revulsion against financial excesses enables, perhaps even forces, a tightening of regulation,” Blinder writes.
Therefore, in Blinder’s view, over-regulation, when it can be achieved, is actually optimal. Or, in his words: “a simple, but not mathematically accurate, way of thinking about the optimality of over-regulation is that it gets the degree of regulation ‘right on average’ over time.” ...

Tuesday, June 14, 2016

Corporate Capture of the Rulemaking Process

Elizabeth Warren:

Corporate Capture of the Rulemaking Process, RegBlog: Regulatory capture is a big deal. It is one way in which powerful corporations rig the system to work for themselves—and the rest of America pays the price. The tilt in Congress is pretty much out there for everyone to see, but corporate influence works its magic even better in the shadows—and that’s where rulemaking occurs. This essay focuses on one aspect of this pervasive phenomenon: the capture of agencies as they write the rules.
When it comes to undue industry influence, our rule-making process is broken from start to finish. At every stage, the process is loaded with opportunities for powerful industry groups to tilt the scales in their favor.
Senator Warren delivers remarks at the recent Regulatory Capture Forum held by the Administrative Conference of the United States.
The tilt starts early. For example, a 2011 study of U.S. Environmental Protection Agency (EPA) records from 1994 to 2009 found that industry groups held a virtual monopoly over informal communications with EPA that occurred before proposed rules on hazardous air pollutants were publicly available. On average, industry groups engaged in 170 times more informal communications with EPA than public interest players—communications that occurred before any proposed rules were even written.
Similarly, with financial regulation, the big banks and their friends have been lobbying the agencies aggressively. ...

Friday, May 13, 2016

Ending "Too Big to Fail": What's the Right Approach?

Ben Bernanke:

Ending "too big to fail": What's the right approach?: In a recent speech at the Hutchins Center at the Brookings Institution, Neel Kashkari, the new president of the Federal Reserve Bank of Minneapolis, argued that we need new strategies to tackle the problem of “too big to fail” (TBTF) financial institutions. On Monday, I’ll be on a panel at the Minneapolis Fed on the issue. This post previews my comments. In short, it seems to me that a lot of progress has been made (and more is in train)... To say that “nothing has been done” is simply not correct. ...
At the 50,000-foot level, a key question is the extent to which structural change in the financial industry is needed to end TBTF, and, to the extent it is, what that change should look like. The argument of this post is that, while substantial and even fundamental changes may ultimately be necessary, we don’t yet know exactly what they will be. Instead, the legacy of the Dodd-Frank Act, the Basel agreements, and other reforms is a sensible process which, with sustained effort, will help us solve the problem. A key element of the strategy is that it gives banks strong incentives to shrink or otherwise restructure themselves to reduce the risk they pose to the financial system.
Why not just break up big banks? ...
My takeaway is not that the problem is solved—that will take more time—but rather that the current approach amounts to a process that will help us find the solution. In particular, the government’s strategy for ending TBTF addresses the deficiencies, noted above, of imposing arbitrary limits on bank size. Most obviously, the strategy does not make the mistake of treating size as the only determinant of systemic risk (e.g., capital surcharges depend on a variety of criteria). ...
If, as seems probable, bank managers and shareholders better understand the institution’s motivations for size and complexity than regulators do, it makes sense to use that knowledge. To do that, the right incentives need to be provided: The privately perceived benefits of TBTF status need to be reduced and the costs increased, so that bank managers and shareholders are considering something closer to the social costs and benefits of size and complexity when they think about how to organize their business. ...
To a first approximation, that’s what the government’s approach aims to do. For example, the capital surcharge and similar regulations directed at systemically important institutions act like taxes on size and complexity. ... That is, the extra costs that regulators impose on systemic institutions force their decisionmakers to “internalize the externality” that their firms create for the financial system. [4] Similarly, the development of the liquidation authority (which raises the probability that creditors will take losses) and improvements in the overall resilience of the financial system (which would reduce any incentive that future regulators might have to try to engineer a bailout) should reduce the perceived benefits associated with TBTF status, as measured in terms of funding costs, for example. Putting creditors at risk also brings market discipline back into play, putting additional pressure on managers not to take excessive risks. Together with the requirements imposed by the living will process, better incentives for managers, shareholders, and creditors should lead, over time, to a banking system that is safer, but also more competitive and efficient.

Monday, April 11, 2016

Paul Krugman: Snoopy the Destroyer

Systemically important presidential elections:

Snoopy the Destroyer, by Paul Krugman, NY Times: Has Snoopy just doomed us to another severe financial crisis? Unfortunately, that’s a real possibility, thanks to a bad judicial ruling that threatens a key part of financial reform. ...
At the end of 2014 the regulators designated MetLife, whose business extends far beyond individual life insurance, a systemically important financial institution. Other firms faced with this designation have tried to get out by changing their business models. For example, General Electric ... sold off much of its finance business. But MetLife went to court. And it has won a favorable ruling from Rosemary Collyer, a Federal District Court judge.
It was a peculiar ruling. Judge Collyer repeatedly complained that the regulators had failed to do a cost-benefit analysis, which the law doesn’t say they should do, and for good reason. Financial crises are, after all, rare but drastic events; it’s unreasonable to expect regulators to game out in advance just how likely the next crisis is, or how it might play out, before imposing prudential standards. To demand that officials quantify the unquantifiable would, in effect, establish a strong presumption against any kind of protective measures.
Of course, that’s what financial firms want. Conservatives like to pretend that the “systemically important” designation is actually a privilege, a guarantee that firms will be bailed out. Back in 2012 Mitt Romney described this part of reform as “a kiss that’s been given to New York banks”..., an “enormous boon for them.” Strange to say, however, firms are doing all they can to dodge this “boon” — and MetLife’s stock rose sharply when the ruling came down.
The federal government will appeal..., but even if it wins the ruling may open the floodgates to a wave of challenges to financial reform. And that’s the sense in which Snoopy may be setting us up for future disaster.
It doesn’t have to happen. As with so much else, this year’s election is crucial. A Democrat in the White House would enforce the spirit as well as the letter of reform — and would also appoint judges sympathetic to that endeavor. A Republican, any Republican, would make every effort to undermine reform, even if he didn’t manage an explicit repeal.
Just to be clear, I’m not saying that the 2010 financial reform was enough. The next crisis might come even if it remains intact. But the odds of crisis will be a lot higher if it falls apart.

Monday, April 04, 2016

Paul Krugman: Cities for Everyone

 "Real solutions to real problems":

Cities for Everyone, by Paul Krugman, Commentary, NY Times: Remember when Ted Cruz tried to take Donald Trump down by accusing him of having “New York values”? It didn’t work, of course, mainly because it addressed the wrong form of hatred. Mr. Cruz was trying to associate his rival with social liberalism — but among Republican voters distaste for, say, gay marriage runs a distant second to racial enmity, which the Trump campaign is catering to quite nicely, thank you.
But there was another reason...: Old-fashioned anti-urban rants don’t fit with the realities of modern American urbanism. Time was when big cities could be portrayed as arenas of dystopian social collapse, of rampant crime and drug addiction. These days, however, we’re experiencing an urban renaissance. ...
Upper-income Americans are moving into high-density areas, where they can benefit from city amenities; lower-income families are moving out of such areas... You may be tempted to say, so what else is new? Urban life has become desirable again, urban dwellings are in limited supply, so wouldn’t you expect the affluent to outbid the rest and move in? ...
But living in the city isn’t like living on the beach, because the shortage of urban dwellings is mainly artificial. Our big cities ... could comfortably hold quite a few more families... The reason they don’t is that rules and regulations block construction. Limits on building height, in particular, prevent us from making more use of the most efficient public transit system yet invented – the elevator. ... And that restrictiveness brings major economic costs. ...
So there’s a very strong case for allowing more building in our big cities. The question is, how can higher density be sold politically? The answer, surely, is to package a loosening of building restrictions with other measures. Which is why what’s happening in New York is so interesting.
In brief, Mayor Bill de Blasio has pushed through a program that would selectively loosen rules on density, height, and parking as long as developers include affordable and senior housing. ...
Not everyone likes this plan. ... But it’s a smart attempt to address the issue, in a way that could, among other things, at least slightly mitigate inequality.
And may I say how refreshing it is, in this ghastly year, to see a politician trying to offer real solutions to real problems? If this is an example of New York values in action, we need more of them.

Sunday, March 27, 2016

'Make Elites Compete: Why the 1% Earn So Much and What To Do about It'

Jonathan Rothwell at Brookings:

... In his “defense of the one percent,” economist Greg Mankiw argues that elite earnings are based on their higher levels of IQ, skills, and valuable contributions to the economy. The globally-integrated, technologically-powered economy has shifted so that very highly-talented people can generate very high incomes.
It is certainly true that rising relative returns to education have driven up inequality. But as I have written earlier, this is true among the bottom 99 percent. There is no evidence to support the idea that the top 1 percent consists mostly of people of “exceptional talent.” In fact, there is quite a bit of evidence to the contrary.
Drawing on state administrative records for millions of individual Americans and their employers from 1990 to 2011, John Abowd and co-authors have estimated how far individual skills influence earnings in particular industries. They find that people working in the securities industry (which includes investment banks and hedge funds) earn 26 percent more, regardless of skill. Those working in legal services get a 23 percent pay raise. These are among the two industries with the highest levels of “gratuitous pay”—pay in excess of skill (or “rents” in the economics literature). At the other end of the spectrum, people working in eating and drinking establishments earn 40 percent below their skill level. ...

Much more here.

Wednesday, March 23, 2016

'Cruz Seeks Economic Wisdom in the Wrong Place'

Barry Ritholtz:

Cruz Seeks Economic Wisdom in the Wrong Place:

Some people look at subprime lending and see evil. I look at subprime lending and I see the American dream in action. -- former U.S. Senator Phil Gramm, Nov. 16, 2008

...Gramm has been brought on as a senior economic adviser to Republican presidential candidate Ted Cruz. This isn't a promising development for Cruz... Not to put too fine a point on it, but I believe -- as do many others -- that Gramm was one of the major figures who helped set the stage for the crisis. ...

Gramm was a key sponsor of the ... Gramm-Leach-Bliley Act, which effectively repealed the piece of the Glass-Steagall Act... The damage caused by rolling back Glass-Steagall pales compared with ... the Commodity Futures Modernization Act of 2000. Gramm was a co-sponsor of the legislation, which exempted many derivatives and swaps from regulation.  Not only was the law problematic, but it veered into potential conflict-of-interest territory. ...

We got a chance to see those consequences a few years later when American International Group failed, thanks in part to swaps ... on $441 billion of securities that turned out to be junk. AIG wasn't required to put up much in the way of collateral, set aside capital or hedge its risk on the swaps. Why would it, when the law said it didn’t have to? The taxpayers were then called upon to bailout AIG to the tune of more than $180 billion.

Maybe it isn't too surprising that Cruz would seek advice from Gramm. Cruz, after all, seems to want to hobble modern economic policy by returning to the gold standard. ... We have seen these movies before, and they end in tragedy and tears. 

He also talks about Gramm's sad performance in his brief appearance as one of McCain's advisors in 2008.

Monday, February 29, 2016

"Financial Transaction Taxes in Theory and Practice'

From the Brookings Institution"

Financial transaction taxes in theory and practice, by Leonard E. Burman, William G. Gale, Sarah Gault, Bryan Kim, Jim Nunns and Steve Rosenthal: The Great Recession, which was triggered by financial market failures, has prompted renewed calls for a financial transaction tax (FTT) to discourage excessive risk taking and recoup the costs of the crisis. ...
[...Review of arguments for and against an FTT...]
Our review and analysis of previous work suggests several conclusions. First, the extreme arguments on both sides are overstated. At the very least, the notion that a FTT is unworkable should be rejected. ... On the other hand, the idea that a FTT can raise vast amounts of revenue ... is inconsistent with actual experience with such taxes.
Second, a wide range of design issues are critical to the formulation of a FTT... Third, although empirical evidence demonstrates clearly that FTTs reduce trading volume, as expected, it does not show how much of the reduction occurs in speculative or unproductive trading versus transactions necessary to provide liquidity. The evidence on volatility is similarly ambiguous: empirical studies have found both reductions and increases in volatility as a result of the tax.
Fourth, the efficiency implications of a FTT are complex, depending on the optimal size of the financial sector, its impact on the rest of the economy, the structure and operation of financial markets, the design of the tax, and other factors.
We also present new revenue and distributional estimates for hypothetical U.S. FTTs... We ... find the tax would be quite progressive. ...
[Paper: Financial Transaction Taxes in Theory and Practice"]

Wednesday, February 10, 2016

'Charge Senior Bank Bosses'

Phil Angelides asks a "simple question":

Charge senior bank bosses, says former commissioner, by Ben McLannahan, FT: Phil Angelides uncovered evidence of widespread fraud and corruption in the US mortgage market as chairman of the commission which produced the government report on the global financial crisis. Five years on, he is asking the Department of Justice why it has yet to call any senior bank executives to account. ... In a letter to Loretta Lynch, US Attorney General, Mr Angelides has challenged the DoJ to take action before the ten-year statute of limitation expires.
“I ask a simple question: how could the banks have engaged in such massive misconduct and wrongdoing without a single individual being involved? In a sense, it’s the immaculate corruption,” he told the FT. “It defies common sense, and the people of America know this" ... "it breeds a great amount of cynicism and anger about the nature of our judicial system.”

'The Cap-and-Trade Sulfur Dioxide Allowances Market Experiment'

From the NBER Digest:

The Cap-and-Trade Sulfur Dioxide Allowances Market Experiment: The Acid Rain Program led to higher levels of premature mortality than would have occurred under a hypothetical no-trade counterfactual with the same overall sulfur dioxide emissions.

Since the passage of the Clean Air Act of 1990, the federal government has pursued a variety of policies designed to reduce the level of sulfur dioxide emissions from coal-fired power plants and the associated acid rain. In The Market for Sulfur Dioxide Allowances: What Have We Learned from the Grand Policy Experiment? (NBER Working Paper No. 21383), H. Ron Chan, B. Andrew Chupp, B. Andrew Chupp, Maureen L. Cropper, and Nicholas Z. Muller evaluate the cost savings and the health consequences of relying on a cap-and-trade sulfur dioxide allowance market to implement emissions reductions.
The key argument advanced by proponents of cap-and-trade programs for pollution reduction is that they are less costly than regulatory programs that impose the same abatement requirements on all polluters. By allowing emission sources with high abatement costs to offset higher on-site emissions by purchasing additional reductions from other, lower-cost polluters, they assert trade in pollution allowances reduces the total cost of achieving a given reduction in aggregate emissions.
To study the cost savings associated with the Acid Rain Program, which allowed such trade, the authors model the cost of abatement for individual coal-fired power plants. They estimate how firms choose between the two leading technologies for sulfur dioxide abatement, burning low-sulfur coal and installing flue-gas desulfurization units. They use these estimates to compare abatement decisions corresponding to the Acid Rain Program and standards that achieve the same aggregate reduction in emissions by making uniform requirements on coal-fired plants, with no trading allowed. They find cost savings in 2002, with the Acid Rain Program in full swing, of approximately $250 million from trade in emission allowances. This is less than half of the previously estimated saving from tradable permits. The data suggest that many generating units were not complying with the Clean Air Act in the most economical manner.
One potential drawback of a cap-and-trade system is that in some areas the level of local pollutants — those which pose the greatest health threat near their place of emission — can be higher than under uniform emission standards. This could occur if, for example, utilities in the densely populated eastern United States, where emission reduction can be comparatively costly, pay utilities in less-populous western regions, where abatement is cheaper, to cut emissions there. The aggregate national reduction may still be achieved, but many more people in the densely populated east could be exposed to pollutants.
The researchers find a greater level of particulate air pollution and associated premature mortality under the Acid Rain Program than under a hypothetical no-trade scenario in which units emitted SO2 at a rate equal to 2002 allowance allocations plus observed drawdowns of their allowance banks. They estimate the cost of health damages associated with observed SO2 emissions in 2002 under the Acid Rain Program to be $2.4 billion higher than would have been the case under the no-trade scenario. They conclude that the health impact of a cap-and-trade program depends on how the program is structured and on the correlation between marginal abatement costs and marginal damages across pollution sources.

'Rescuing a SIFI, Halting a Panic: the Barings Crisis of 1890'

Eugene White at the Bank of England's Bank Underground:

Rescuing a SIFI, Halting a Panic: the Barings Crisis of 1890, Bank Underground: The collapse of Northern Rock in 2007 and Bear Sterns, Lehman Brothers, and AIG in 2008 renewed the debate over how a lender of last resort should respond to a troubled systemically important financial institution (SIFI). Based on research in the Bank of England Archive, this post re-examines a crisis in 1890 when the Bank, supported by central bank cooperation, rescued Baring Brothers & Co. and quashed a banking panic and a currency crisis, while mitigating moral hazard. This rescue is significant because it combined features similar to those mandated by recent U.K., U.S., and European reforms to ensure an orderly liquidation of SIFIs and increase the accountability of senior management (e.g. Title II of the Dodd-Frank Act (2010); the U.K. “Senior Managers Regime”).
Financial historians (Bordo (1990); Schwartz (1986); Bignon, Flandreau, & Ugolini, (2012)) have argued that, when faced with a crisis in the nineteenth century, the Bank of England simply followed Bagehot’s Rule to lend freely at a high rate to preserve market liquidity (Bagehot (1873)). This “historical fact” has lent support to policy recommendations to strictly follow Bagehot in a crisis. By downplaying the rescue and treating the 1890 crisis as minor (Turner (2014)), historians have overlooked its significance and that of its French precursor; thus they have missed important examples of successful pre-emptive intervention that limited damage to the economy and future risk-taking. ...
The rescue package provided to Barings was modelled on the 1889 rescue of the Comptoir d’Escompte. This commercial and investment bank had supported an effort to corner the copper market with loans and vast off-balance sheet guarantees of forward contracts. When copper prices fell, the Comptoir’s president committed suicide, prompting a run. The Banque de France provided loans of 140 million francs to meet withdrawals and, co-operating with the Minister of Finance, formed a bankers’ guarantee syndicate to absorb the first 40 million francs of losses. Contributions were assigned according to banks’ ability to pay and their role in the crisis, measured by how closely they were tied by interlocking directorships to the Comptoir. In addition, substantial fines and clawbacks were imposed on the directors and senior management. The run on the Comptoir abated and spread no further. A “good bank”, the Comptoir National d’Escompte, was recapitalized, while the Banque de France took over the liquidation of the toxic copper assets (Hautcoeur, Riva & White (2014)).
The British press had chronicled this Parisian rescue in detail; and London bankers were well-informed. But, given that policy was formulated quickly behind closed doors, histories have been silent on the importance of the French example. The key connection is found in Alphonse De Rothschild letter of November 14 (Figure 2), where he compared the two crises and declared: “La situation à l’égard de la Baring est exactement la même que celle dans laquelle se trouvait le Comptoir d’Escompte” – roughly translated, “The situation with regards to Barings is exactly the same as the one in which the Comptoir d’Escompte found itself” (Rothschild Archives, London). He then laid out the role that the House of Rothschild should play, pushing for the formation of a British guarantee syndicate, and specifying the Rothschild contribution. ...
The Barings rescue or “lifeboat” was announced on Saturday November 15, 1890. The Bank of England provided an advance of £7.5 million to Barings to discharge their liabilities. A four-year syndicate of banks would ratably share any loss from Barings’ liquidation. The guarantee fund of £17.1 million included all institutions, and some of the largest shares were assigned to banks whose inattentive lending had permitted Barings to swell its portfolio. The old firm was split into a recapitalized “good bank”, Baring Brothers & Co. Ltd., which took over the still profitable trade finance and a “bad bank” that retained its name and its toxic assets, managed by the Bank of England.
The Barings’ partners agreed to this arrangement, delivering powers-of-attorney over their property, avoiding the danger of a fire sale. But, as unlimited liability partners, they were still expected to cover any losses. The partners’ investments, country homes, town houses and their contents were to be sold with the proceeds moved to the asset side of the bad bank’s balance sheet (Figure 3). This assessment paralleled the liability imposed on the board of directors and senior management of the Comptoir. These payments covered most losses; and neither the French or British syndicates were called upon. Ultimately, the remains of the “bad” Barings bank was sold to a group of investors for £1.5 million, closing the liquidation. The heavy assessments on the Barings appear to have dampened risk-taking, as no other major bank failed before World War I and in general banks became more conservative (Baker & Collins (1990)). ...
This new research reveals that the two most important central banks of the late nineteenth century did not exclusively adhere to Bagehot’s rule. While the Bank of England and the Banque de France responded to panics by lending freely at high rates on good collateral, they also intervened to rescue deeply distressed SIFIs. Central bank cooperation to obtain liquidity and coordination with the Treasury were then critical to ensure that toxic assets were liquidated in an orderly fashion to minimize losses. Combined with penalties levied on the responsible principals, they were strikingly bold and successful rescues. While one may object that recent crises erupted because of system-wide incentives to take risk (Too Big To Fail, deposit insurance and flawed governance), these two episodes should be thought of as identifying appropriate policies to manage individual troubled SIFIs if the system-wide incentives can be brought under control.

Monday, February 08, 2016

'The Scandal is What's Legal'

Cecchetti & Schoenholtz:

The Scandal is What's Legal: If you haven’t seen The Big Short, you should. The acting is superb and the story enlightening: a few brilliant outcasts each discover just how big the holes are that eventually bury the U.S. financial system in the crisis of 2007-2009. If you’re like most people we know, you’ll walk away delighted by the movie and disturbed by the reality it captures. ...
But we’re not film critics. The movie—along with some misleading criticism—prompts us to clarify what we view as the prime causes of the financal crisis. The financial corruption depicted in the movie is deeply troubling (we’ve written about fraud and conflicts of interest in finance here and here). But what made the U.S. financial system so fragile a decade ago, and what made the crisis so deep, were practices that were completely legal. The scandal is that we still haven’t addressed these properly.
We can’t “cover” the causes of the crisis in a blog post, but we can briefly explain our top three candidates: (1) insufficient capital and liquidity reflecting poor risk management and incentives; (2) the ability of complex, highly interconnected intermediaries to take on and conceal enormous amounts of risk; and (3) an absurdly byzantine regulatory structure that made it virtually impossible for anyone, however inclined, to understand (let alone manage) the system’s fragilities. ...[long explanationss of each]...
To say that this is a scandal that makes the system less safe is to dramatically understate the case.
Now, we could go on. There are plenty of other problems that policymakers have ignored and are allowing to fester (how about the government-sponsored enterprises?). But we focused on our top three: the need for financial intermediaries to have more capital and liquid assets; the need to improve the ability of both financial market participants and authorities to assess and control risk concentrations through a combination of central clearing and better information collection; and the need to simplify the structure and organization of the U.S. regulatory system itself.
Only if people learn how far the financial system remains from these ideals, only if they understand that the scandal is almost always what is legal, will there be much chance of making the next crisis less severe. ...

Tuesday, January 26, 2016

'Reality Check in the Factory'

This is from Peter Dizikes at MIT News:

Reality check in the factory: When the globalization of manufacturing took flight a few decades ago, the problem of industrial workplace safety also became fully globalized. As many scholars, human-rights advocates, and labor leaders have observed, that challenge consists of more than just persuading developing nations to create labor laws — it is also a matter of enforcing those labor laws.
Indeed, enforcement may be the greater challenge, as new factories continue to spread across vast distances in Asia, Central America, and other regions. Problems include unsafe buildings, inhumane hours, pollution, unpaid wages, and more. A common enforcement scenario today involves an underfunded regulatory agency with a small staff, and hundreds of potential cases to examine. Where do regulators even begin?
Matthew Amengual, an assistant professor at the MIT Sloan School of Management, started investigating that question on the ground in Argentina nearly a decade ago — talking to regulators, union bosses, firm managers, and key players with knowledge about labor conditions. Over time, he interviewed hundreds of people, watched inspections occur, and catalogued Argentina’s intricate regulatory politics as deeply as any outside observer has.
What Amengual found surprised him. A large thread within political science theory, drawing from the German sociologist Max Weber, holds that states can best enforce labor laws when they act as politically neutral arbiters of regulations. But such neutral arbiters largely did not exist in Argentina. There, many regulators only learned where to find malfeasance by working closely with non-neutral parties, say, union leaders, or immigrant groups. The process of regulation needed to be politicized to happen at all.
In other cases, active regulators came from the ranks of business managers who were using their knowledge to clean up their own industries. None of this was textbook political science theory. But it was how things worked. ...
A “watershed moment” in Amengual’s research occurred in the Argentine province of Cordoba, when an inspector he knew met up with a union leader representing metal workers. Soon the two of them, and Amengual, were driving off in the union leader’s car to a factory.
‘The labor unions have all kinds of information and resources that allow the inspectors to do their jobs,” Amengual says. In Cordoba, he notes, the regulators “didn’t even have cars to be able to go out and do the inspections. They didn’t have time. They didn’t have strong training.”  
But the regulators did have information they could act on, courtesy of the unions — and so they did. Enforcement would not have been possible otherwise.
That said, while regulators were busy inspecting the metal industry, they were less watchful over small-scale brickmakers, an industry where many kinds of violations may have been even more abundant, but which lacked union organizing.  
“You have enforcement, but it’s happening where the unions are present, not [always] where it’s most needed,” Amengual says.
It wasn’t just labor advocates driving regulation, however. Surprisingly, in the province of Tucuman, where sugar mills that produced ethanol were polluting the water, the move toward legal compliance occurred thanks in part to business managers who joined the government and pushed firms to meet environmental regulations.
The government hired regulators “right out of industry, they gave them short-term contracts, and some of them went right back into industry afterwards,” Amengual says. “It was a recipe for disaster, according to [political science theory]. But those were the guys who were actually doing something to enforce environmental laws.” 
How could that happen? Amengual attributes it partly to the presence of environmental groups, in conjunction with the gradual increase in regulators’ ability to assess the pollution problems. “Industry actually wanted regulators between it and the social movement pressure,” Amengual observes.
In turn, Amengual says, he would like political scientists and policymakers alike to recognize these realities of regulation. Instead of regarding politicized enforcement as a tainted form of state action, he thinks, people should realize that labor regulations are always going to be political. The question is how to let the politics spur enforcement, while not totally capturing the process.
“If this is the way policies are being enforced in much of the world, it does matter,” Amengual asserts. “I don’t think Argentina is unique.” ...

Sunday, January 24, 2016

Banks' Influence on Congressional ''Reform'' of the Fed

Narayana Kocherlakota:

Banks' Influence on Congressional “Reforms” of the Fed: Senator Sanders’ December 23 NYT op-ed expressed concern about what he perceived to be an undue influence of the financial sector on the Federal Reserve. In my last post, I explained how the Fed could allay these concerns through greater transparency about the role of the Board of Governors. In this post, I elaborate on what I see as a much bigger problem: the financial sector’s influence on Congress as it seeks to “reform” the Fed.
Here’s an example of what I mean. Last year, Congress amended Section 10.1 of the Federal Reserve Act. That section now requires a person who is experienced with community banks to be on the Board of Governors. There is no other explicit sectoral requirement of this kind in the Act.
How should one interpret this new statutory requirement? The issue is not whether it is often beneficial to have a Board member who has prior experience with community banks. I fully agree that it is. But that’s true of many other sectors in the US economy. So why is Congress picking this particular sector as being one that needs to be represented on the Board?
Unfortunately, the answer is clear to me (as I suspect that it will be to anyone who fills this new slot): Congress wants the Fed to tilt supervision, regulation, and monetary policy to be more favorable to community banks. This interpretation is consistent with the fact that the passage of this statutory change came after six years of lobbying from the Independent Community Bankers of America.
This statutory preference for community banks is disturbing. It’s true that community banks are often located on Main Street. But the interests of community banks are absolutely not the same as the interests of Main Street.
In terms of supervision and regulation: lax supervision and regulation increases the probability of bank failure. Bank failures impose a cost on the FDIC which is, ultimately, backstopped by the taxpayer. Community banks operating in the interests of their shareholders should not - and don’t - fully internalize these taxpayer costs. Accordingly, community banks systematically favor less supervision and regulation than would be in the public interest.
In terms of monetary policy, the profits that banks derive from many of their products are positively correlated with the overall level of interest rates in the economy. For this reason, community bankers typically favor higher interest rates than is in the general public interest. (Of course, this preference is shared by larger financial institutions for similar reasons.)
In writing the above, I’m not intending to be critical of community banks. They’re private businesses. No one should expect the interests of a given private business to coincide with the general public interest.
The problem is with Congress. Congress is supposed to act in the interest of the public. But this law is not in the public interest. Instead, it is a rather clear attempt to influence the Fed so that it acts more in the interest of (part of) the financial sector.
In his op-ed, Senator Sanders says that he wants to reform the Fed so that “the foxes would no longer guard the henhouse”. The first step in this agenda should be to repeal the recent amendment to section 10.1 of the Federal Reserve Act. This step will not be easy to accomplish. The amendment passed with overwhelming support from both parties in both Houses of Congress.

Sunday, January 10, 2016

'Market Bubbles: What Goes Up Doesn't Always Come Down'

I wonder if conditioning on the type of bubble (e.g. driven by housing) would make a difference (though not sure it would be possible to fit them into tidy categories). I guess another way to ask the question is whether the cases of a "dramatic market rise followed by an equally spectacular fall" have anything in common:

Market Bubbles: What Goes Up Doesn't Always Come Down, by Matt Nesvisky, NBER Digest: The great majority of booms during which market values doubled in a single year were not followed by crashes wiping out those gains.

Do market booms inevitably result in busts? History suggests not, according to William N. Goetzmann in Bubble Investing: Learning from History (NBER Working Paper No. 21693).
A dramatic market rise followed by an equally spectacular fall, such as a doubling in prices that is followed by a halving in value, is often regarded as a bubble followed by a bust. Seeking out such events, Goetzmann analyzes returns for 42 stock markets around the world from 1900 through 2014. He finds that bubble-and-bust episodes are uncommon, and urges caution in drawing conclusions from the widely-reported and discussed great bubbles of history.
Conditional upon a market boom amounting to a stock price increase of 100 percent or more in a three-year period, crashes gave back prior gains only 10 percent of the time. Market prices were more likely to double again following a 100 percent price boom. The frequency of a market crash over a five-year period is significantly higher when that market has just experienced a boom, but the frequency of doubling over the next five years is not much affected by whether a market has recently boomed. Thus a boom does raise the probability of a crash, but the probability of a crash remains low. Probabilities of a crash following a boom in which prices doubled in a single calendar year were also higher, however the great majority of such extreme events were not followed by crashes that wiped out those gains.
Goetzmann suggests that his findings are relevant for regulators who are considering the desirability of deflating bubbles. If bubbles are often associated with investment in promising, albeit risky, new technologies, then when considering policies that may deflate them, policy-makers may face a trade­off between staving off a financial crisis and encouraging fruitful investment. They may evaluate this trade-off differently if the probability of a crash following a boom is low rather than high.

Friday, January 08, 2016

'It's Time to Return to Market-Based Antitrust Law'

Kevin Drum:

It's Time to Return to Market-Based Antitrust Law: Tim Lee makes an interesting argument today. He notes that cell phone plans have gotten a lot better lately ...

Why has this happened? Because for the past couple of years T-Mobile has been competing ferociously with cheaper, more consumer-friendly plans, and the rest of the industry has had to keep up. But what prompted T-Mobile to become the UnCarrier in the first place?

Back in 2011, AT&T was on the verge of gobbling up T-Mobile, which would have turned the industry's Big Four into the Big Three and eliminated the industry's most unpredictable company....But then the Obama administration intervened to block the merger. With a merger off the table, T-Mobile decided to become a thorn in the side of its larger rivals, cutting prices and offering more attractive service plans. The result, says Mark Cooper, a researcher at the Consumer Federation of America, has been an "outbreak of competition" that's resulted in tens of billions of dollars in consumer savings. ...

Antitrust law in America has been off track for decades, and it's time to get back on. The ... feds should concentrate on one simple thing: making sure there's real competition in every industry. Then let the market figure things out. There are exceptions here and there to this rule, but not many.

Competition is good. Corporations may not like it, and they'll fight tooth and nail for their rents. But it's good for everyone else.

Tuesday, December 29, 2015

'The Fed and Financial Reform – Reflections on Sen. Sanders op-Ed'

This is the beginning of a long response from Larry Summers to an op-ed by Bernie Sanders:

The Fed and Financial Reform – Reflections on Sen. Sanders op-Ed: Bernie Sanders had an op Ed in the New York Times on Fed reform last week that provides an opportunity to reflect on the Fed and financial reform more generally. I think that Sanders is right in his central point that financial policy is overly influenced by financial interests to its detriment and that it is essential that this be repaired. At the same time, reform requires careful reflection if it is not to be counterproductive. And it is important in approaching issues of reform not to give ammunition to right wing critics of the Fed who would deny it the capacity to engage in the kind of crisis responses that have judged in their totality been successful in responding to the financial crisis.  The most important policy priority with respect to the Fed is protecting it from stone age monetary ideas like a return to the gold standard, or turning policymaking over to a formula, or removing the dual mandate commanding the Fed to worry about unemployment as well as inflation. ...

Friday, December 18, 2015

Paul Krugman: 'The Big Short,' Housing Bubbles and Retold Lies

Why are Murdoch-controlled newspapers attacking "The Big Short?"

‘The Big Short,’ Housing Bubbles and Retold Lies, by Paul krugman, Commentary, NY Times: In May 2009 Congress created a special commission to examine the causes of the financial crisis. The idea was to emulate the celebrated Pecora Commission of the 1930s, which used careful historical analysis to help craft regulations that gave America two generations of financial stability.
But some members of the new commission had a different goal. ... Peter Wallison of the American Enterprise Institute, wrote to a fellow Republican on the commission ... it was important that what they said “not undermine the ability of the new House G.O.P. to modify or repeal Dodd-Frank”...; the party line, literally, required telling stories that would help Wall Street do it all over again.
Which brings me to a new movie the enemies of financial regulation really, really don’t want you to see.
The Big Short” ... does a terrific job of making Wall Street skulduggery entertaining, of exploiting the inherent black humor of how it went down. ... But you don’t want me to play film critic; you want to know whether the movie got the underlying ... story right. And the answer is yes, in all the ways that matter. ...
The ...housing ... bubble ... was inflated largely via opaque financial schemes that in many cases amounted to outright fraud — and it is an outrage that basically nobody ended up being punished ... aside from innocent bystanders, namely the millions of workers who lost their jobs and the millions of families that lost their homes.
While the movie gets the essentials of the financial crisis right, the true story ... is deeply inconvenient to some very rich and powerful people. They and their intellectual hired guns have therefore spent years disseminating an alternative view ... that places all the blame ... on ... too much government, especially government-sponsored agencies supposedly pushing too many loans on the poor.
Never mind that the supposed evidence for this view has been thoroughly debunked..., constant repetition, especially in captive media, keeps this imaginary history in circulation no matter how often it is shown to be false.
Sure enough, “The Big Short” has already been the subject of vitriolic attacks in Murdoch-controlled newspapers...
The ... people who made “The Big Short” should consider the attacks a kind of compliment: The attackers obviously worry that the film is entertaining enough that it will expose a large audience to the truth. Let’s hope that their fears are justified.

Monday, December 07, 2015

Hillary Clinton: How I’d Rein In Wall Street

Hillary Clinton's plan for Wall Street:

Hillary Clinton: How I’d Rein In Wall Street: Seven years ago, the financial crisis sent our economy into a tailspin. ...
Under President Obama, our economy has come a long way back. ... And we have tough new rules on the books, including the Dodd-Frank Act, that protect consumers and curb recklessness on Wall Street.
But not everyone sees that as a good thing. Republicans, both in Congress and on the campaign trail, are dead-set on rolling back critical financial protections. ...
President Obama and congressional Democrats should do everything they can to stop these efforts. But it’s not enough simply to protect the progress we have made. As president, I would not only veto any legislation that would weaken financial reform, but I would also fight for tough new rules, stronger enforcement and more accountability that go well beyond Dodd-Frank. ...

Thursday, December 03, 2015

'Fed Emergency Lending'

Ben Bernanke:

Fed emergency lending: Earlier this week, the Federal Reserve’s Board of Governors approved a rule implementing restrictions on its emergency lending powers that were mandated by Congress in the 2010 Dodd-Frank Act. On the whole, the rule is a sensible compromise which clarifies the procedures for Fed lending in a panic while responding to critics’ concerns. ... Going forward, however, we should be wary of any further changes that might have the effect of deterring financial firms from borrowing from the Fed during a financial panic. ...

In a financial panic, providers of short-term funding to financial institutions refuse to renew their lending, out of fear that an institution might fail. ... When banks or other financial firms cannot obtain funding, they ... stop extending credit to households and businesses, which can bring the economy to a halt.

The most important tool that central banks (like the Fed) have for fighting financial panics is their ability to serve as a lender of last resort... Crucially, the Fed retains the authority to lend freely in a panic. ...

My biggest concern about the collective impact of the reforms is related to what economists call the stigma of borrowing from the central bank. For lender-of-last resort policies to work, financial institutions have to be willing to avail themselves of the central bank’s loans. If they fear that by doing so that they will be identified by the marketplace as weak, and thus subject to even more pressure from creditors and counterparties, then they will see borrowing from the Fed as counterproductive and will stay away. This is the stigma problem... Deprived of access to funding, financial firms will instead hoard cash, dump assets, cut credit, and call in loans, with bad effects on the whole economy.

We faced a serious stigma problem during the recent crisis, and, collectively, the reforms to the Fed’s lending authorities have probably made the problem worse. An example is the effect of new reporting requirements. Dodd-Frank requires that the identities of all borrowers (including non-emergency borrowers through the discount window) be disclosed... These provisions serve the important purposes of advancing transparency, accountability, and democratic legitimacy, and I am not advocating that they be changed. But we should be aware that, by increasing the risk of early disclosure of borrowers’ identities, these requirements will probably reduce the willingness of firms to borrow from the Fed in a panic... 

I don’t see an easy remedy for this problem. As is often the case, policymakers must trade off competing goals. However, in contemplating possible future changes to the Fed’s authorities, we should be very careful to avoid anything that might worsen further the stigma problem...

Friday, October 16, 2015

Paul Krugman: Democrats, Republicans and Wall Street Tycoons

Financial tycoons broke up with Democrats. Now they ♥ Republicans (or maybe they are just using them with their money):

Democrats, Republicans and Wall Street Tycoons, by Paul Krugman, Commentary, NY Times: Hillary Clinton and Bernie Sanders had an argument about financial regulation during Tuesday’s debate — but it wasn’t about whether to crack down on banks. Instead, it was about whose plan was tougher. The contrast with Republicans like Jeb Bush or Marco Rubio, who have pledged to reverse even the moderate financial reforms enacted in 2010, couldn’t be stronger.
For what it’s worth, Mrs. Clinton had the better case. ... But is Mrs. Clinton’s promise to take a tough line on the financial industry credible? Or would she ... return to the finance-friendly, deregulatory policies of the 1990s? ...
To understand the politics of financial reform and regulation, we have to start by acknowledging that there was a time when Wall Street and Democrats got on just fine. Robert Rubin of Goldman Sachs became Bill Clinton’s most influential economic official; big banks had plenty of political access; and the industry by and large got what it wanted, including repeal of Glass-Steagall.
This cozy relationship was reflected in campaign contributions, with the securities industry splitting its donations more or less evenly between the parties, and hedge funds actually leaning Democratic.
But then came the financial crisis of 2008, and everything changed.
Many liberals feel that the Obama administration was far too lenient on the financial industry in the aftermath of the crisis. ... But the financiers didn’t feel grateful for getting off so lightly. ... Financial tycoons loom large among the tiny group of wealthy families that is dominating campaign finance this election cycle — a group that overwhelmingly supports Republicans. Hedge funds used to give the majority of their contributions to Democrats, but since 2010 they have flipped almost totally to the G.O.P. ... Wall Street insiders take Democratic pledges to crack down on bankers’ excesses seriously. And it also means that a victorious Democrat wouldn’t owe much to the financial industry.
If a Democrat does win, does it matter much which one it is? Probably not. Any Democrat is likely to retain the financial reforms of 2010, and seek to stiffen them where possible. But major new reforms will be blocked until and unless Democrats regain control of both houses of Congress, which isn’t likely to happen for a long time.
In other words, while there are some differences in financial policy between Mrs. Clinton and Mr. Sanders, as a practical matter they’re trivial compared with the yawning gulf with Republicans.

Thursday, October 15, 2015

'Monopolies Don't Give Us Nice Things'

I've been arguing we need to take a more active approach to reducing market power for many years, without much traction, so it's always nice to see others joining in (it hasn't been enough, but the Obama administration has been better than the Bush administration on this front). This is from Barry Ritholtz:

Monopolies Don't Give Us Nice Things: ...There is little intelligent discussion about the costs of too much regulation on the one hand, and the excesses of capitalism on the other. That is a shame, because both sides of those issues create real economic frictions with substantial societal costs. ...
I would like to address ... how poor a job the U.S. does in regulating industries to which it grants monopoly or oligopoly status. ...
As a nation we do a very poor job of managing competition and adopting the needed standards to improve market efficiency. Television services are just one example. ...
It seems impossible, however, to have a serious conversation about this as long as rich companies buy off elected officials who grant special tax breaks, dispensations and exemptions. You can pretty much name any intractable problem in the U.S. and you can trace it back to the money corrupting the political process. ...

Thursday, October 08, 2015

Wanted: Independent Evaluations of Government Programs

In case you are feeling Moody:

Timothy Geithner and the Auditors, by Dean Baker: Eduardo Porter had a good piece in the NYT pointing out the importance of having independent evaluations of government programs. The point is that the agencies undertaking a program have a strong incentive to exaggerate its benefits. ...
One of the areas noted by Porter is in the rating of mortgage backed securities (MBS). During the housing bubble years, the bond-rating agencies routinely gave investment grade ratings to MBS that were stuffed with junk mortgages. They ignored the quality of the mortgages because they wanted the business. They knew if they gave honest ratings, the investment banks would take away their business.
While Porter notes this is a problem with the issuer pays model (the banks pay the rating agencies), there actually is a very simple solution. In the debate on Dodd-Frank, Senator Al Franken proposed an amendment which would have the Securities and Exchange Commission pick the rating agency, instead of the issuer. The bank would still pay the fee, but since they were no longer controlling who got the work, it eliminated the conflict of interest problem. The amendment passed the senate 65-34, with considerable bi-partisan support.
Unfortunately, as Geithner indicated in his autobiography, the Obama administration apparently did not like the dismantling of the perfect system we have today. The Franken amendment was removed in the conference committee and the existing structure was left in place. This was possible because the bond-rating agencies and the banks have real lobbies, whereas the folks who like honest evaluations don't. Of course the news media didn't help much, giving the issue very little coverage. And what attention it did get largely reflected the views of the financial industry.
Anyhow, this is a good example of the difficulties in putting in place the sort of independent auditing process that Porter seeks.

Sunday, September 27, 2015

Bank Panics and the Next 30 Years

The end of an essay by David Warsh:

... Many regulators and bankers contend that the thousand-page Dodd Frank Act complicated the task of a future panic rescue by compromising the independence of the Fed. Next time the Treasury Secretary will be required to sign off on emergency lending.
Bank Regulators?  Some economists, including Gorton, worry that by focusing on its new “liquidity coverage ratio” the Bank for International Settlements, by now the chief regulator of global banking, will have rendered the international system more fragile rather than less by immobilizing collateral.
Bankers?  You know that the young ones among them are already looking for the Next New Thing.
Meanwhile, critics left and right in the US Congress are seeking legislation that would curb the power of the Fed to respond to future crises.
So there is plenty to worry about in the years ahead. Based on the experience of 2008, when a disastrous meltdown was avoided, there is also reason to hope that central bankers will once again cope. Remember, though, as the Duke of Wellington said of the Battle of Waterloo, it was a close-run thing.

Update: See Brad Delong's reply.

Friday, September 25, 2015

Paul Krugman: Dewey, Cheatem & Howe

Republicans can't help but side with business, but there are very good reasons for the recent increase in regulatory oversight:

Dewey, Cheatem & Howe, by Paul Krugman, Commentary, NY Times: Item: The C.E.O. of Volkswagen has resigned after revelations that his company committed fraud on an epic scale, installing software on its diesel cars that detected when their emissions were being tested, and produced deceptively low results.
Item: The former president of a peanut company has been sentenced to 28 years in prison for knowingly shipping tainted products that later killed nine people and sickened 700.
Item: Rights to a drug used to treat parasitic infections were acquired by Turing Pharmaceuticals, which specializes not in developing new drugs but in buying existing drugs and jacking up their prices. In this case, the price went from $13.50 a tablet to $750. ...
There are, it turns out, people in the corporate world who will do whatever it takes, including fraud that kills people, in order to make a buck. And we need effective regulation to police that kind of bad behavior... But we knew that, right?
Well, we used to know it... But ... an important part of America’s political class has declared war on even the most obviously necessary regulations. ...
A case in point: This week Jeb Bush, who has an uncanny talent for bad timing, chose to publish an op-ed article in The Wall Street Journal denouncing the Obama administration for issuing “a flood of creativity-crushing and job-killing rules.” Never mind his misuse of cherry-picked statistics, or the fact that private-sector employment has grown much faster under President Obama’s “job killing” policies than it did under Mr. Bush’s brother’s administration. ...
The thing is, Mr. Bush isn’t wrong to suggest that there has been a move back toward more regulation under Mr. Obama, a move that will probably continue if a Democrat wins next year. After all, Hillary Clinton released a plan to limit drug prices at the same time Mr. Bush was unleashing his anti-regulation diatribe.
But the regulatory rebound is taking place for a reason. Maybe we had too much regulation in the 1970s, but we’ve now spent 35 years trusting business to do the right thing with minimal oversight — and it hasn’t worked.
So what has been happening lately is an attempt to redress that imbalance, to replace knee-jerk opposition to regulation with the judicious use of regulation where there is good reason to believe that businesses might act in destructive ways. Will we see this effort continue? Next year’s election will tell.

Thursday, September 24, 2015

'Rational Drug Pricing'

Should we rationally expect rational drug pricing?:

Rational Drug Pricing, by Jeff Sachs: Drug pricing has taken center stage in U.S. politics, and it's high time that it should. ...
Drug pricing is not like the pricing of apples and oranges, clothing, or furniture that well and good should be left to the marketplace. There are two major reasons. First, the main cost of drug production is not the cost of manufacturing the tablet but the cost of producing the knowledge embedded in the tablet. Second, there is often a life-and-death stake in access to the drug, so society should take steps to ensure that the drug is affordable and accessible.
To ensure that financial resources flow to scientists to produce the knowledge embedded in the tablet, the government does two things. First, the government pays directly for a substantial part of the research and development (R&D). ... Second, the government grants patent rights for drug discovery. ...
It's a basic insight of economics that patent rights are a "second-best" solution to drug pricing, not an optimal solution. A patent creates an artificial monopoly to incentivize R&D. Yet it also reduces access to the product, perhaps with unacceptable and immoral life-and-death consequences. Rational drug pricing would get the best of the patent system but ensure that it is compatible with access to the life-saving drugs.
Unfortunately, the current rules of the game in the U.S. pharmaceutical sector do not compensate for the weaknesses of patents. They amplify them. ... What should be done? Here are three key principles.
First, private R&D should certainly be protected by patents but only enough to elicit the needed R&D, not to produce outlandish profits. ...
Second, when the U.S. government pays for much of the R&D, it should share in the property rights. This should be a no-brainer, but in fact the NIH simply gives away most or all the intellectual property that it has financed, so the taxpayer pays part of the R&D bills but the returns are fully captured by private companies.
Third, when companies ... make profits from their U.S.-based research and U.S.-based production and sales, they should certainly pay U.S. taxes on their profits. The fact that the IRS lets them hide their profits in overseas tax havens is scandalous and without any logical justification whatsoever.

Wednesday, September 23, 2015

'Jeb Bush Has No Clue About Business Regulation'

Kevin Drum is not impressed with Jeb Bush's plan for regulation, or his justification for it:

Jeb Bush Has No Clue About Business Regulation: Jeb Bush today in the Wall Street Journal:

To understand what is wrong with the regulatory culture of the U.S. under President Obama, consider this alarming statistic: Today, according to the World Bank—not exactly a right-wing think tank—the U.S. ranks 46th in the world in terms of ease of starting a business. That is unacceptable. Think what the U.S. could be and the prosperity we could have if we rolled back the overregulation that keeps us from ranking in the top 10.

My goodness. That does sound unacceptable. Still, it never hurts to check up on these presidential candidates... So let's click the link ... and see what it says: "The rankings of economies with populations over 100 million are based on data for 2 cities." Hmmm. It turns out the World Bank is ranking the US based on starting up a business in New York City. That seems to tip the scales a wee bit, no? ...

Now I get it. This isn't about getting a business up and running. It's solely about registering a new business. And it's got nothing to do with any of Obama's regulations. It's all about state and local stuff. ... I'm not sure what Jeb Bush thinks he's going to do to streamline this. Bottom line: this is completely meaningless. ...

But wait! There's more. The World Bank does have a broader "Ease of Doing Business" rank that takes into account the things you need to do to get up and running: construction permits, electricity, credit, paying taxes, enforcing contracts, etc. As it happens, the bulk of this stuff is still state and local, and has nothing to do with Obama or the federal government. Still, let's take a look since Jeb chose not to share it with us for some reason...

The World Bank has us in 7th place. We're already in the top ten that Jeb is aiming for. Mission accomplished! ...

As for the outrageous regulations he promises to repeal on Day One, this would mostly just benefit big campaign donors, not the yeoman entrepreneurs he claims to be sticking up for. No big surprise there, I suppose.

Wednesday, September 02, 2015

'The Evolution of Scale Economies in U.S. Banking'

This is a question I have wanted to see an answer to for a long time. What is the minimum efficient scale for financial institutions? This is an important question with respect to breaking up large banks into smaller entities. Some have argued, based on very little compelling evidence as far as I can tell, that breaking up big banks would be costly because large banks are able to exploit economies of scale. Others disagree, but again evidence for either point of view is unclear. I don't mean there is no evidence at all, the existing research is described in the introduction to this paper, but the results do not point strongly in any particular direction. Hopefully, more work on the topic will shift the weight of the evidence in one direction or another:

The Evolution of Scale Economies in U.S. Banking, by David C. Wheelock and Paul W. Wilson, August 2015: Abstract Continued consolidation of the U.S. banking industry and general increase in the size of banks has prompted some policymakers to consider policies to discourage banks from getting larger, including explicit caps on bank size. However, limits on the size of banks could entail economic costs if they prevent banks from achieving economies of scale. The extent of scale economies in banking remains unclear. This paper presents new estimates of returns to scale for U.S. commercial banks based on nonparametric, local-linear estimation of bank cost, revenue and pro t functions. We present estimates for both 2006 and 2012 to compare the extent of scale economies in banking some four years after the financial crisis and two years after enactment of the Dodd-Frank Act with scale economies prior to the crisis. We find that most banks faced increasing returns to scale in cost in both years, though results for the very largest banks in 2012 are somewhat sensitive to specification. Further, most banks faced decreasing returns in revenue in both years, though nearly all banks could still increase revenue and pro t by becoming larger.

[As I've written many, many times, I do not think that breaking up big banks will do a lot to reduce our susceptibility to bank crises. After all, we had a financial crisis about every 20 years in the 1800s, and this continued through the Great Depression, and at that time banks were relatively small. Thus, it seems that crises have more to do with the diversity of activity and connectedness than bank size. I favor breaking up the biggest banks to reduce their political power, which I believe is excessive, and to reduce their economic power. If the above results had shown that the minimum efficient scale was much smaller than the typical large, systemically important bank, breaking them up would be an easy call. But that's not what the results imply. Thus, in this case, there is a tradeoff between the benefit or reducing political and economic power versus losing economies of scale (not sure how steep the cost function is at the existing size -- if it's relatively flat the loss of scale economies could be small). The other alternative is to treat them along the lines of a public utility. We allow them to be large to exploit scale economies, then regulate pricing and other behavior. However, this is where the political power of the large banks matters, and it's not clear that a policy of "large but with regulatory oversight" is the best option to pursue.]

Tuesday, July 21, 2015

Financial Regulation: Which Reform Strategy is Best?

Today is the 5th anniversary of the Dodd-Frank financial reform bill. When the bill was being debated, I was torn on which strategy is best, to strike while the iron is hot -- to implement financial reform legislation as soon as possible -- or to take a patient approach that allows careful consideration and study of proposed regulatory changes:

Kashyap and Mishkin ... may be right that now is not the time to change regulations because it could create additional destabilizing uncertainty in financial markets, and that waiting will give us time to see how the crisis plays out and to consider the regulatory moves carefully. But as we wait, passions will fade, defenses will mount, the media will respond to the those opposed to regulation by making it a he said, she said issue that fogs things up and confuses the public as well as politicians. By the time it is all over there's every chance that legislation will pass that is nothing but a facade with no real teeth that can change the behaviors that go us into this mess.

More and more, I think doing what you can while passions are inflamed, and then defending the legislation as much as possible when the inevitable attack from the industry comes is the best strategy. For example, in the WSJ two days ago, there was an opinion piece with the title "After Five Years, Dodd-Frank Is a Failure," and the sub-header "The law has crushed small banks, restricted access to credit, and planted the seeds of financial instability."

There is a problem with small banks. Here's an email I received earlier this year (last March, in response to an article of mine at CBS MoneyWatch on the decline in the number of small banks and how that could harm smaller buinesses):

Mr. Thoma,
I am a regular reader of your columns, and lean more to the left than virtually any banker I know, but I have to tell you that you are on to something with the decline in the number of small banks, and regulations. As the Chairman of a small bank in [state omitted], the shear amount of regulations that have come out since the banking crisis started are incredible. I know of banks in the area which have simply had to hire a full time staff person to help with compliance. Our bank has had to hire the CPA firm [omitted] to have them come in once a quarter to help us keep up with the compliance. Obviously, this crimps our profits, as does the ZLB which we have had to deal with for six years now, through no fault, at all, of our own.
Don't get me wrong, I understand why all these regulations have been put in place, but unfortunately for us, most of these have little to do with our small bank. They seem to be designed to keep the behemoths out of trouble, and we got dragged along. There needs to be a different set of rules for banks under a certain size. Banks like ours, who keep all our loans in house, and aren't a threat to the economy as a whole, have never been ones to "screw" our customers, or write "bogus" loans, and sell them. Our loan losses since 2008 have been minimal to say the least, because we try very hard to make loans that are going to be repaid. Our total losses over the last six or seven years are not any worse than, and probably, better than they were before the banking crisis arrived.
We, as a board of the bank, have talked on numerous occasions in the last few years on what to do about this problem, and have brought it up with the federal regulators at our last two exams, but have really gotten no where as far as coming up with any ideas on what to do to try and alleviate these burdens on small banks. Any suggestions, or publicity regarding the issue, would be greatly appreciated.

The point I'm trying to make is this. There are two choices when trying to fix a financial system after a crisis. The first is to move fast while the politics are supportive, and put as many of the needed rules and regulations in place as possible. Then, over time, *carefully* adjust the rules to overcome unforeseen problems (while resisting attempts to rollback needed legislation, a delicate balance). The second is to proceed slowly and deliberately and "consider the regulatory moves carefully" before implementing legislation. But by the time this deliberate procedure has been completed, it may very well be that the politics have changed and nothing will be done at all. So I'd rather move fast, if imperfectly, and then fix problems later instead of waiting in an attempt to put near perfect legislation in place and risk doing very little, or nothing at all.

Wednesday, July 01, 2015

Did Dodd-Frank Fix Too Big To Fail?

Gara Afonso and João Santos at the NY Fed's Liberty Street Economics blog:

What Do Bond Markets Think about “Too-Big-to-Fail” Since Dodd-Frank?: In our previous post, we concluded that, in rating agencies’ views, there is no clear consensus on whether the Dodd-Frank Act has eliminated “too-big-to-fail” in the United States. Today, we discuss whether bond market participants share these views.
As we discussed in our post on Monday, the Dodd-Frank Act includes provisions to address whether banks remain “too big to fail.” Title II of the Act creates an orderly liquidation mechanism for the Federal Deposit Insurance Corporation (FDIC) to resolve failed systemically important financial institutions (SIFIs). ...
Since the Dodd-Frank Act makes it easier to intervene at the holding company level, we predict that, relative to the pre-Dodd-Frank era, investors’ perceptions of the risk of holding bonds of a parent company would have increased relative to the risk of holding bonds of its subsidiary bank. To test this hypothesis, we compared how bond spreads evolved for a matched pair of bonds—one issued by the parent company and one by its subsidiary bank. This approach lets us isolate any differential effect of the new resolution procedure on the parent company relative to its subsidiary. A downside, though, is that there are only a few cases where both the parent and the subsidiary have the same bonds traded in financial markets.
Contrary to our hypothesis, the difference in option-adjusted spreads to Treasuries of the parent companies and their subsidiary banks ... has not widened since the Dodd-Frank Act was enacted. ...
Our previous post demonstrated that rating agencies do not have a unanimous view of the current level of government support of U.S. commercial banks and their holding companies. The results here indicate that market participants’ perceptions of the relative risk have not increased as one would have expected given the new resolution framework introduced by the Dodd-Frank Act. ...
Together the evidence suggests that rating agencies and market participants may have some doubts about the ability, so far, of the Dodd-Frank Act to deal with “too big to fail.” However, some observers have argued that once all provisions of the Dodd-Frank Act are implemented, any remaining expectations of government support will disappear. Time will tell.

Wednesday, May 27, 2015

'Bailout Barometer: How Large is the Financial Safety Net?'

John Cochrane points to this from the Richmond Fed (he has a few additional comments):

Bailout Barometer: How Large is the Financial Safety Net?: ...The Bailout Barometer is our estimate of the share of financial system liabilities for which the federal government provides protection from losses. In addition to protection from explicit government guarantee programs, our estimate includes implicit protection that people are likely to infer from past government actions and statements. Despite efforts to end ad hoc bailouts, the financial safety net that protects certain firms remains large under current government policies.

Estimated Share of Financial Sector Liabilities Subject to Implicit or Explicit Government Protection From Loss (as of 12/31/13)

How large is it?

Our latest estimate shows that the financial safety net covers 60 percent of the financial sector. This estimate also includes a breakdown by sector. These measures, compiled in March 2015, use data as of December 31, 2013. Our Bailout Barometer has grown considerably since our first estimate in 1999.

Why does it matter?

When creditors expect to be protected from losses, they will overfund risky activities, making financial crises and bailouts like those that occurred in 2007-08 more likely. An extensive safety net also creates a need for robust supervision of firms benefitting from perceived protection. Over time, shrinking the financial safety net is essential to restore market discipline and achieve financial stability. Doing so requires credible limits on ad hoc bailouts. Read more on our perspective.

Want to learn more?

Tuesday, May 26, 2015

'Free-Market Dogma has Jacked Up our Electricity Bills'

David Cay Johnston

Free-market dogma has jacked up our electricity bills: A new analysis shows that people pay 35 percent more for electricity in states that abandoned traditional regulation of monopoly utilities in the 1990s compared with states that stuck with it. ....
You might think that the higher prices in the 15 states with markets would encourage investment, creating an abundance of new power plants. That, at any rate, is what right-wing Chicago School economic theories on which the electricity markets were created say should happen. The validity of these theories, and flaws in how they were implemented, matter right now because Congress is considering a raft of energy supply bills that include some expansion of the market pricing of wholesale electricity. ...
Yet just 2.4 percent of new electric generating capacity in 2013 “was built for sale into a market,” electricity-market analyst Elise Caplan showed in a study last fall... The rest were built in states with traditional regulation or under long-term supply contracts that essentially guaranteed repayment of loans to build the plants.
Here’s another measure of failure: Areas covered by electricity markets have 60 percent of America's generating capacity, but enjoyed just 6 percent of new generation built in 2013.
If unregulated markets are invariably better, as the Chicago School holds, why was 94 percent of new generating capacity built in traditionally regulated jurisdictions? ...

Wednesday, May 13, 2015

'Wyoming’s War on Microbiology'

Mike the Mad Biologist:

Wyoming’s War on Microbiology: Well, they’re not calling it that, but this Wyoming law is definitely not going to make our water cleaner, or stop the spread of antibiotic resistance genes...:
…the new law makes it a crime to gather data about the condition of the environment across most of the state if you plan to share that data with the state or federal government. The reason? The state wants to conceal the fact that many of its streams are contaminated by E. coli bacteria, strains of which can cause serious health problems, even death. ... Rather than engaging in an honest public debate about the cause or extent of the problem, Wyoming prefers to pretend the problem doesn’t exist. And under the new law, the state threatens anyone who would challenge that belief by producing information to the contrary with a term in jail...
The new law is of breathtaking scope. It makes it a crime to “collect resource data” from any “open land,” meaning any land outside of a city or town, whether it’s federal, state, or privately owned. The statute defines the word collect as any method to “preserve information in any form,” including taking a “photograph” so long as the person gathering that information intends to submit it to a federal or state agency. In other words, if you discover an environmental disaster in Wyoming, even one that poses an imminent threat to public health, you’re obliged, according to this law, to keep it to yourself.
While this law will probably be ruled unconstitutional, its intent is horrendous...
For me personally, the timing is ironic, as I’ve spent the last week involved in various agriculture-related microbiology meetings, and the constant refrain was “we need more data on what people are doing” (e.g., how are they using antibiotics?). In the areas of food and water safety, we desperately need more data. ...

Monday, May 11, 2015

'An Open Letter to Bill McNabb, CEO of Vanguard Group'

Stephen G. Cecchetti and Kermit L. Schoenholtz (sort of a follow up on the claim that financial reform is working -- perhaps -- but as noted in the post below this one there is more to do):

An Open Letter to Bill McNabb, CEO of Vanguard Group: Dear Mr. McNabb,
We find your WSJ op-ed (Wednesday, May 6) misleading, short-sighted, self-serving, and very disappointing.
Vanguard has been in the forefront of providing low-cost, reliable access to U.S. and global capital markets to millions of customers, including ourselves. Following the financial crisis of 2007-2009, the firm naturally should be a leader in promoting a more resilient financial system. Your op-ed sadly goes in the opposite direction.
Let’s start with the most stunning example: your defense of money market mutual funds. MMMFs are simply banks masquerading as professionally managed investment products. Like banks, they engage in liquidity and maturity transformation. Like banks, they faced runs in 2008 that ended only when the federal government provided a guarantee that put taxpayers at risk. Even with that guarantee, the government still had to support many healthy U.S. corporations with household names that – having previously relied on MMMF purchases of their commercial paper – suddenly faced a severe credit crunch. And, to limit a fire sale amidst the crisis, the Federal Reserve had to provide special funding to buyers to help MMMFs unload their assets.
Unsurprisingly, fund sponsors and their clients – both creditors and borrowers – want to keep these opaque federal subsidies (especially the implicit guarantees that only become explicit and transparent in a crisis). Like them, you make the false, but popular claim that power-hungry regulators (who wish to limit the subsidies that make future crises more likely) are attacking (taxing!) Main Street instead of Wall Street.
In fact, the investment company industry captured its primary regulator long ago, and hasn’t let go. The Securities and Exchange Commission’s 2014 “reform” of MMMFs is exhibit A. It almost surely makes these funds more, not less, liable to runs (see here and here). And – what a surprise – Congress seems to find protecting U.S. taxpayers from contingent liabilities (like implicit financial guarantees to your industry) less attractive than the largesse of financial lobbyists. Even the voluminous Dodd-Frank Act didn’t address MMMFs! ...

After quite a bit more, they conclude with:

As the CEO of one of the largest mutual fund companies in the world that is dedicated to serving and protecting small investors, you should be in the vanguard of advocating reforms that enhance stability.
Instead of complaining about regulation under the guise of protecting Main Street, you should highlight the vulnerabilities in our financial system and make the case for efficient regulation that treats all activities equally. You should also promote investment vehicles that are likely to prove robust in a crisis, while warning about existing products that probably won’t be.
Only greater resilience in the system can make investors confident that capital markets here and elsewhere will remain strong. That is in Vanguard’s interest, too.
Sincerely,
Stephen G. Cecchetti and Kermit L. Schoenholtz

Paul Krugman: Wall Street Vampires

Financial reform seems to be working:

Wall Street Vampires, by Paul Krugman, Commentary, NY Times: Last year the vampires of finance bought themselves a Congress. I know it’s not nice to call them that, but I have my reasons, which I’ll explain in a bit. For now, however, let’s just note that these days Wall Street, which used to split its support between the parties, overwhelmingly favors the G.O.P. And the Republicans who came to power this year are returning the favor by trying to kill Dodd-Frank, the financial reform enacted in 2010.
And why must Dodd-Frank die? Because it’s working. ...
For one thing, the Consumer Financial Protection Bureau — the brainchild of Senator Elizabeth Warren — is, by all accounts, having a major chilling effect on abusive lending practices. And early indications are that enhanced regulation of financial derivatives — which played a major role in the 2008 crisis — is having similar effects, increasing transparency and reducing the profits of middlemen.
What about the problem of ... “too big to fail”? There, too, Dodd-Frank seems to be yielding real results, in fact, more than many supporters expected. ...
All of this seems to be working: “Shadow banking,” which created bank-type risks while evading bank-type regulation, is in retreat. ...
But the vampires are fighting back.
O.K., why do I call them that? Not because they drain the economy of its lifeblood, although they do: there’s a lot of evidence that oversize, overpaid financial industries — like ours — hurt economic growth and stability. Even the International Monetary Fund agrees.
But what really makes the word apt in this context is that the enemies of reform can’t withstand sunlight. Open defenses of Wall Street’s right to go back to its old ways are hard to find. When right-wing think tanks do try to claim that regulation is a bad thing that will hurt the economy, their hearts don’t seem to be in it. ...
Republicans would love to undo Dodd-Frank, but they are, rightly, afraid of the glare of publicity that defenders of reform like Senator Warren — who inspires a remarkable amount of fear in the unrighteous — would shine on their efforts.
Does this mean that all is well on the financial front? Of course not. Dodd-Frank is much better than nothing, but far from being all we need. And the vampires are still lurking in their coffins, waiting to strike again. But things could be worse.

Tuesday, April 21, 2015

'An Overwhelming Argument for Draconian Bank Regulation'

Paul Krugman on John Taylor's claim that deviations from his Taylor Rule caused the financial crisis:

...if it’s really that easy for monetary errors to endanger financial stability — if a deviation from perfection so small that it leaves no mark on the inflation rate is nonetheless enough to produce the second-worst financial crisis in history — this is an overwhelming argument for draconian bank regulation. Modest monetary mistakes will happen, so if you believe that these mistakes caused the global financial crisis you must surely believe that we need to do whatever it takes to make the system less fragile. Strange to say, however, I don’t seem to be hearing that from Taylor or anyone else in that camp.

Saturday, April 18, 2015

'Are We Kidding Ourselves on Competition?'

This seems implausible to me, yet there seems to be evidence for it:

Are we kidding ourselves on competition?, by Joshua Gans: ...Consider a situation where there are 10 firms in a market and they compete with one another. Now suppose that all shareholders — say because they are following the dicta of diversification — allocate their wealth in equal proportion across those 10 firms. That means that each owner of the firm — even if there are thousands of these — cares equally about each firm’s profits.
So ask yourself: when those shareholders vote on the composition of boards or the management of the firm, or, importantly how the management of the firm is compensated, are they going to vote for managers who will care only about the profits of the firm they manage or about the profits more broadly? The answer is obvious: they will look to managers who manage in the interest of shareholders and so that means they care about all firm profits and not just the one of their own firm.
In a world where shareholders can get what they want, we won’t have competition in this outcome but, more likely, a collusive outcome. What is more, the firms won’t have to go to all the difficulty of violating antitrust laws to obtain this outcome, they will do it unilaterally. There are no laws against that. ...
Now this isn’t just speculation. Jose Azar, an economist now at Charles River Associates, did his Princeton PhD on this topic. His theory paper is here and it builds on others including Gordon (1990), Hansen and Lott (1995) and O’Brien and Salop (2000). Frank Wolak and I came up with a similar set of issues related to cross-ownership and hedging in electricity markets (for vertical ownership) and verified anti-competitive consequences arising from this. But Azar, along with Martin Schmalz and Isabel Tecu have demonstrated that cross-ownership has anti-competitive impacts on the US airline industry. They find that cross ownership increases US airline prices 3–5%. When they use the event whereby BlackRock acquired Barclays Global Investors (a merger changing the shares of common ownership in airlines), they found such ownership could indicate 10% bumps in pricing with US airline ticket prices rising by 0.6% as a result of that merger alone. ...
The point here is that we cannot really ignore this issue as economists or as policy-makers. We have “known” about it for decades. Now’s the time to take it seriously.

[There's a bit more in the original post.]

Thursday, April 16, 2015

'No More Cheating: Restoring the Rule of Law in Financial Markets'

Simon Johnson:

No More Cheating: Restoring the Rule of Law in Financial Markets, by Simon Johnson: ... In a speech on Wednesday, Senator Elizabeth Warren (D., MA) laid out a vision for better financial markets. This is not a left-wing or pro-big government agenda. Senator Warren’s proposals are, first and foremost, pro-market. She wants – and we should all want – financial firms and markets that work for customers, that encourage innovation, and that do not build up massive risks which can threaten the financial system and bring down the economy.

Senator Warren puts forward two main sets of proposals. The first is to more strongly discourage the deception of customers. This is hard to argue against. Some parts of the financial sector are well-run, providing essential services at reasonable prices and with sound ethics throughout. Other parts of finance have drifted, frankly, into deceiving people – on fees, on risks, on terms and conditions – as a primary source of profits. We don’t allow this kind of cheating in the non-financial sector and we shouldn’t allow it in finance either.

The unfortunate and indisputable truth is that our rule-making and law-enforcement agencies completely fell asleep prior to 2008 with regard to protecting borrowers and even depositors against predation. Even worse, since the financial crisis, the Securities and Exchange Commission, the Justice Department, and the Federal Reserve Board of Governors proved hard or near impossible to awake from this slumber.

We need simple, clear rules that ensure transparency and full disclosure in all financial transactions – and we need to enforce those rules. This is what was done with regard to securities markets after the debacle of the early 1930s. ...

The second proposal is to end the greatest cheat of all – the implicit subsidies received by the largest financial institutions, structured so as to encourage excessive and irresponsible risk-taking. These consequences of these subsidies have already caused massive macroeconomic damage – this is why our crisis in 2008-09 was so severe and the recovery so slow. Yet we have made painfully little progress towards really ending the problems associated with some very large financial firms – and their debts – being viewed by markets and policymakers as being too big to fail. ...

Wednesday, April 15, 2015

'Labor Market Regulation Does Not Hamper Long-Term Performance'

Speaking of "Gloomy European Economist" Francesco Saraceno' (see post below this one):

What Structural Reforms?, by Francesco Saraceno: I am ready to bet that the latest IMF World Economic Outlook ... will make a certain buzz for a box. It is box 3.5, at page 36 of chapter 3, which has been available on the website for a few days now. In that box, the IMF staff presents lack of evidence on the relationship between structural reforms and total factor productivity, the proxy for long term growth and competitiveness. (Interestingly enough people at the IMF tend to put their most controversial findings in boxes, as if they wanted to bind them).
What is certainly going to stir controversy is the finding that while long term growth is negatively affected by product market regulation, excessive labour market regulation does not hamper long term performance.
It is not the first time that the IMF surprises us with interesting analysis that goes against its own previous conventional wisdom. I will write more about this shortly. Here I just want to remark how these findings are relevant for our old continent.
The austerity imposed to embraced by eurozone crisis countries has taken the shape of expenditure cuts and labour market deregulation, whose magic effects on growth and competitiveness have been sold to reluctant and exhausted populations as the path to a bright future. I already noted, two years ago, that the short-run pain was slowly evolving into long-run pain as well, and that the gain of structural reforms was nowhere to be seen. The IMF tells us, today, that this was to be expected.
The guy who should be happy is Alexis Tsipras; he has been resisting since January pressure from his peers (and the Troika, that includes IMF staff!) to further curb labour market regulations, and recently presented a list of reforms that mostly pledges to reduce crony capitalism, tax evasion and product market rigidities. Exactly what the IMF shows to be effective in boosting growth. ...
This happens in Washington. Problem is, Greece, and Europe at large, seem to be light years away from the IMF research department. We already saw, for example with the mea culpa on multipliers, that IMF staff in program countries does not necessarily read what is written at home. Let’s see whether the discussion on Greece’s reforms will mark a realignment between the Fund’s research work and the prescriptions they implement/suggest/impose on the ground.