We are converted MMIC users in our research group and are currently very comfortable with its features for doing experiments and so on. American Evaluation Twitter page link to surveygizmo . Worth having a look at this to see whether it has useful features above what your own web package can do.
That's perhaps the most curious trait of these ordinary Americans: you don't need to give them any money to lead them to hope that you might. Take Larry Summers, for instance. We both know that we would never actually employ even this surprisingly intelligent Mort in anything but the most humiliatingly ceremonial role. But he doesn't know that — and thus he has done so much for us.
It’s funny because it’s true.
That's perhaps the most curious trait of these ordinary Americans: you don't need to give them any money to lead them to hope that you might. Take Larry Summers, for instance. We both know that we would never actually employ even this surprisingly intelligent Mort in anything but the most humiliatingly ceremonial role. But he doesn't know that — and thus he has done so much for us.
It’s funny because it’s true.
1. Karl Whelan on whether we need more PhD Economists in the civil service
2. Stephen Kinsella on the road to recovery
3. A remarkable piece by George Osborne and Richard Thaler. I somehow doubt that “We can make you behave” was a title they suggested to the editors.
4. The Keynes/Hayek rap is up to over 350,000 hits – report.
5. Tim Harford talks in the FT about a behavioural economics application in Afghanistan
1. Erin Go Blog . An article written in Forbes that provides an ode to the Irish Economy blog. Well deserved praise. In general, the idea of a death of blogging in Ireland is a simple miscalculation based on quantity rather than quality. Some of the blogs that are starting to settle down are a real addition to the public sphere
2. IAREP call for papers . You will regret it later if you do not submit something.
3. Ghost estates per county on the Ireland after NAMA blog. Good stuff again.
4. Psychology Today on debt and personal growth
5. Richard Breen will give the ESRI Geary Lecture this year (thanks Michael)
The fanfare of publicity surrounding the announcement that the UK had experienced – hold your breath! – 0.1% of growth during the last three months of 2009 was embarrassingly inappropriate in several ways. First, and most obvious, was the awkwardness of statisticians behaving like media tarts. The explanation can only be their fear of facing the Osborne axe if the Tories get elected.
Second was the celebration over such a paltry increase – and in the quarter when all economists and statisticians know that the bulk of retail activity takes place every year. This time the Christmas effect will have been exaggerated because of what used to be January sales taking place before Christmas. The data are seasonally adjusted to attempt to eliminate these effects, but given the unpredictability of both business and consumers in these extremely unusual times, 0.1% growth is really no news at all. The dismal ‘growth’ trend in the figure from ONS illustrates this.
The most intelligent commentators extrapolated from this 0.1% to tell us how much smaller our economy is now than it would have been if we had followed ‘a normal growth path’: around 6%. I wonder how many people will think about that and realise what it teaches us about the rapid nature of expansion when we are following ‘the normal growth path’. Growth on growth, exponentially in this manner, is what is driving us to the planetary abyss. As the authors of Limits to Growth identified, humans have a problem grasping the abstract reality of exponential growth. To help explain they included this story in their report:
‘French children are told a story in which they imagine having a pond with water lily leaves floating on the surface. The lily population doubles in size every day and if left unchecked will smother the pond in 30 days, killing all the other living things in the water. Day after day the plant seems small and so it is decided to leave it to grow until it half-covers the pond, before cutting it back. They are then asked, on what day that will occur. This is revealed to be the 29th day, and then there will be just one day to save the pond.’
So we can learn lessons about the weakness of statistics and the crisis of economic growth, but I think I have detected a more encouraging sign: that people are not behaving like rational economic men. The statistics on which economic planning is based are monetary figures, so they include all the pointless shuffling around of money that a financial economy indulges in. If you are interesting in the real economy of stuff, then the second figure is more illuminating: manufacturing industry in the UK has fallen off a cliff.
And yet unemployment has not risen anything like as rapidly as predicted. In economic theory, a recession results in firms automatically reducing output and cutting prices and wages. They do this in a competitive process and without regard to the human costs. Yet in this recession we have seen firms negotiating with workers to share the available work and the income that is available to be paid out in wages.
Is this merely an adaptation of capitalism, where we willingly cut our own wages? I would prefer to interpret it as humanity rather than flexibility in the workplace. Since the steady-state economy implies a level of economic activity considerably lower than that which prevailed before the recession, this bargaining over the value of production is something that should be facilitated and extended.
This is not a review. Just an attempt to stir up some interest in advance of a bookclub. “Identity Economics, How our identities shape our work, wages and well-being” by George Akerlof and Rachel Kranton was published recently by Princeton University Press. It draws from and develops material published by the two authors, particularly articles in the QJE, JEL, JEP and AER published from 2000 to 2008, articles that will be familiar to a lot of readers here.
The book is divided into ten chapters and four sections. Section 1 Economics and Identity comprises (i) introduction (ii) identity economics (iii) identity and norms (iv) where we fit. In particular, this section advances the idea that incorporating identity into economics is an important step in economics, as important as the process largely already undertaken of incorporating human judgment processes. They argue that norms and social categorisation are fundamental components of human decision making and valuation in a way that is simply not characterised adaquately in standard accounts of utility and tastes.
Section 2 Work and Schooling comprises (v) Organisations and (vi) Schooling. This section applies the identity economics framework to these two key components of economic life. The first chapter argues that understanding economic organisations such as firms and factories requires a detailed understanding of the identity and roles played by individuals within the organisation. Their schooling chapter considers the key role of identity in how people make decisions about and transition through schooling.
Section 3 “Gender and Race” comprises (vii) “Gender and Work” and (viii) “Race and Poverty”. The first of these chapters considers gender identity and work. The second examines ethnic identities and the relation to poverty, in particular advancing the idea of identity feedback loops between minority and majority that can lead to perpetuating cycles of poverty for affected ethnic groups.
Section 4 “Looking Ahead” comprises (ix) Methodology and (x) Looking Ahead. Chapter (ix) argues that methods such as IV and natural experiments cannot fully encapsulate what is driving the relation between identity and economic outcomes, and advocates for richer descriptive accounts of economic systems and subsystems. Chapter 10 concludes on how identity considerations may change economics.
This is not the place for a lengthy review. I recommend strongly that anyone with an interest in behavioural economics read the book. The extent to which identity as described by the authors truly adds to behavioural economics will be debated thoroughly as a result of this work. I really look forward to discussing this book in lectures and our bookclub and I am sure it will reoccur on this site as it begins to filter more into economic debate.
With respect to our policy debate in Ireland, the book raises a number of questions, a sample of which I list below purely to get the ball rolling. I would really welcome a chance to debate the ideas in this book with a wide variety of people, inside and outside economics.
- the extent to which identity considerations render ineffective jobs programmes aimed at areas where male unemployment is now the majority position.
- the extent to which men and women derive serious positive and negative utility through adherence or non-adherence to prescribed gender roles and the extent to which this matters for economic policy.
- the extent to which “working class” identities influence school and college choice and the extent to which this interacts to major government spending initiatives in promoting access to education.
- how identity interacts with working roles to lead to well-being.
- the extent to which Irish identity influences our economic behaviour in areas like consumption, saving, migration, working patterns and so on.
1. From geek.com, the Sleep Cycle Alarm Clock App for iPhone. This app monitors oscillations between “awake”, “dreaming” and “deep sleep” using the accelerometer in the iPhone. Apparently it’s better to wake up in a phase of “light sleep”.
2. Economists have examined the allocation of time to sleep. Recent evidence suggests that nearly 25% of U.S. adults (47 million) suffer from some level of sleep deprivation. But maybe we’re getting more sleep in the recession? Up to 22 minutes more per day?
3. “The Art of Labormetrics” by Daniel Hamermesh. I’m surprised that this has escaped my attention until now: it’s a NBER-WP from 1999. Appropiateness and cleanliness of data are considered, as are problems of extreme observations and interactions. Also covered are IV, natural experiments, selection and unobserved individual effects. The meaning of results and the clarity of presentation are also discussed. This is the most comprehensive review that I have seen about doing empirical micro research.
4. Randomizer.org: This site is designed for researchers and students who want a quick way to generate random numbers or assign participants to experimental conditions. Since its release in 1997, Research Randomizer has been used to generate number sets over 9.6 million times.
5. The ESRI’s 50th Anniversary. Anniversary events include two Geary lectures in 2010, the first of which will be given by Professor Richard Breen (Yale) on the topic of ’social mobility and education’. Registration is now open: here.
6. A matter of life and death: a TEDTalk about the importance of using personal location data to gauge health history. “Bill Davenhall wants to improve physicians’ diagnostic techniques by collecting each patient’s geographic and environmental data, and merging it with their medical records.”
7. A look back on the App Economy of Facebook in 2009. “We'd like to look back at some examples of startups and established companies, including those from Facebook’s own fbFund program, that built their businesses on Facebook Platform and with Facebook Connect, and made significant strides in funding, acquisitions, and creating new jobs in 2009.”
8. Inon: the UK’s leading provider of behavioural software. Using behavioural economics to help companies provide more value to customers and increase their revenues.
In addition to being a jaw-droppingly superficial idea overall, here's another reason why breaking up the banks and capping their size would be a titanic mistake. Everyone seems to agree that normal, non-TBTF banks can be resolved without causing a meltdown in financial markets. This is, in fact, the justification given for capping bank size — it would make all banks "small enough" to be resolved smoothly, which means that no single bank failure would pose systemic risks. Mission accomplished! Of course, this argument quickly breaks down when you think for more than 15 minutes about how the FDIC resolves failed banks.
The FDIC resolves the vast majority of failed banks through what's known as "purchase and assumption" agreements, or P&As. P&As are transactions in which a healthy bank purchases some or all of the assets of a failed bank and assumes some or all of the liabilities, including all insured deposits. P&As are much less disruptive to both communities and financial markets than straight deposit-payoffs by the FDIC. The FDIC has used P&As to resolve 163 of the 187 failed banks since the beginning of 2008. The JPMorgan/Bear Stearns deal was also a form of P&A (which was entirely intentional), with the Fed playing the role of the FDIC.
Now imagine that we cap bank size at, say, $100bn in assets. What happens if a bank with $99bn in assets fails? The way the FDIC resolves failed banks smoothly is through P&As, but the only banks big enough to buy the $99bn failed bank would surely be over the $100bn cap if they agreed to the purchase. So the choice is effectively between (1) a disorderly liquidation by the FDIC, which would pose exactly the kind of systemic risks that proponents of capping bank size are trying to avoid; or (2) granting an acquiring bank (or banks) a waiver from the $100bn cap and proceeding with a P&A. (The FDIC could technically use a conservatorship, but these are extremely rare, and no regulator has the capacity to manage a $99bn conservatorship.)
But think about how potential acquiring banks would respond if the FDIC approached them and offered them a waiver on the $100bn cap in exchange for agreeing to a P&A. They would think:
"Well, the government begged JPMorgan to buy Bear and begged BofA to buy Merrill, but then the government turned around and forced JPM and BofA to break themselves up a few years later! So thanks but no thanks, Sheila, we're not interested in buying a bank that you're just going to force us to divest in a couple years."
So with a cap on bank size, P&As would likely be off-the-table for the largest bank failures. But if the FDIC can't use P&As, then it can't ensure that the largest banks will be resolved smoothly—and thus pose no systemic risks—even with a cap on bank size in place! And if the FDIC can't ensure that the failure of the largest banks won't pose systemic risks, then what was the point of the cap on bank size in the first place?
See how easy it is to knock down this silly "break up the banks" idea?
Please don’t get sucked into the NY Fed/AIG circus tomorrow. There is nothing there. The people who are hyping this as some sort of outrage(!) are charlatans, and they’re hyping this purely for their own benefit. Either that, or they simply have no idea what they’re talking about. Look, these are complicated issues of securities law, with many competing interests. Anyone who tries to tell you that this as a simplistic story about good vs. evil is trying to manipulate you. Please resist the urge to regurgitate these simplistic narratives.
Oh yeah, and please stop quoting Chris Whalen as some sort of expert on finance. The guy is a freaking lunatic.
Thank you.
In addition to being a jaw-droppingly superficial idea overall, here's another reason why breaking up the banks and capping their size would be a titanic mistake. Everyone seems to agree that normal, non-TBTF banks can be resolved without causing a meltdown in financial markets. This is, in fact, the justification given for capping bank size — it would make all banks "small enough" to be resolved smoothly, which means that no single bank failure would pose systemic risks. Mission accomplished! Of course, this argument quickly breaks down when you think for more than 15 minutes about how the FDIC resolves failed banks.
The FDIC resolves the vast majority of failed banks through what's known as "purchase and assumption" agreements, or P&As. P&As are transactions in which a healthy bank purchases some or all of the assets of a failed bank and assumes some or all of the liabilities, including all insured deposits. P&As are much less disruptive to both communities and financial markets than straight deposit-payoffs by the FDIC. The FDIC has used P&As to resolve 163 of the 187 failed banks since the beginning of 2008. The JPMorgan/Bear Stearns deal was also a form of P&A (which was entirely intentional), with the Fed playing the role of the FDIC.
Now imagine that we cap bank size at, say, $100bn in assets. What happens if a bank with $99bn in assets fails? The way the FDIC resolves failed banks smoothly is through P&As, but the only banks big enough to buy the $99bn failed bank would surely be over the $100bn cap if they agreed to the purchase. So the choice is effectively between (1) a disorderly liquidation by the FDIC, which would pose exactly the kind of systemic risks that proponents of capping bank size are trying to avoid; or (2) granting an acquiring bank (or banks) a waiver from the $100bn cap and proceeding with a P&A. (The FDIC could technically use a conservatorship, but these are extremely rare, and no regulator has the capacity to manage a $99bn conservatorship.)
But think about how potential acquiring banks would respond if the FDIC approached them and offered them a waiver on the $100bn cap in exchange for agreeing to a P&A. They would think:
"Well, the government begged JPMorgan to buy Bear and begged BofA to buy Merrill, but then the government turned around and forced JPM and BofA to break themselves up a few years later! So thanks but no thanks, Sheila, we're not interested in buying a bank that you're just going to force us to divest in a couple years."
So with a cap on bank size, P&As would likely be off-the-table for the largest bank failures. But if the FDIC can't use P&As, then it can't ensure that the largest banks will be resolved smoothly—and thus pose no systemic risks—even with a cap on bank size in place! And if the FDIC can't ensure that the failure of the largest banks won't pose systemic risks, then what was the point of the cap on bank size in the first place?
See how easy it is to knock down this silly "break up the banks" idea?
Please don’t get sucked into the NY Fed/AIG circus tomorrow. There is nothing there. The people who are hyping this as some sort of outrage(!) are charlatans, and they’re hyping this purely for their own benefit. Either that, or they simply have no idea what they’re talking about. Look, these are complicated issues of securities law, with many competing interests. Anyone who tries to tell you that this as a simplistic story about good vs. evil is trying to manipulate you. Please resist the urge to regurgitate these simplistic narratives.
Oh yeah, and please stop quoting Chris Whalen as some sort of expert on finance. The guy is a freaking lunatic.
Thank you.
The fanfare of publicity surrounding the announcement that the UK had experienced – hold your breath! – 0.1% of growth during the last three months of 2009 was embarrassingly inappropriate in several ways. First, and most obvious, was the awkwardness of statisticians behaving like media tarts. The explanation can only be their fear of facing the Osborne axe if the Tories get elected.
Second was the celebration over such a paltry increase – and in the quarter when all economists and statisticians know that the bulk of retail activity takes place every year. This time the Christmas effect will have been exaggerated because of what used to be January sales taking place before Christmas. The data are seasonally adjusted to attempt to eliminate these effects, but given the unpredictability of both business and consumers in these extremely unusual times, 0.1% growth is really no news at all. The dismal ‘growth’ trend in the figure from ONS illustrates this.
The most intelligent commentators extrapolated from this 0.1% to tell us how much smaller our economy is now than it would have been if we had followed ‘a normal growth path’: around 6%. I wonder how many people will think about that and realise what it teaches us about the rapid nature of expansion when we are following ‘the normal growth path’. Growth on growth, exponentially in this manner, is what is driving us to the planetary abyss. As the authors of Limits to Growth identified, humans have a problem grasping the abstract reality of exponential growth. To help explain they included this story in their report:
‘French children are told a story in which they imagine having a pond with water lily leaves floating on the surface. The lily population doubles in size every day and if left unchecked will smother the pond in 30 days, killing all the other living things in the water. Day after day the plant seems small and so it is decided to leave it to grow until it half-covers the pond, before cutting it back. They are then asked, on what day that will occur. This is revealed to be the 29th day, and then there will be just one day to save the pond.’
So we can learn lessons about the weakness of statistics and the crisis of economic growth, but I think I have detected a more encouraging sign: that people are not behaving like rational economic men. The statistics on which economic planning is based are monetary figures, so they include all the pointless shuffling around of money that a financial economy indulges in. If you are interesting in the real economy of stuff, then the second figure is more illuminating: manufacturing industry in the UK has fallen off a cliff.
And yet unemployment has not risen anything like as rapidly as predicted. In economic theory, a recession results in firms automatically reducing output and cutting prices and wages. They do this in a competitive process and without regard to the human costs. Yet in this recession we have seen firms negotiating with workers to share the available work and the income that is available to be paid out in wages.
Is this merely an adaptation of capitalism, where we willingly cut our own wages? I would prefer to interpret it as humanity rather than flexibility in the workplace. Since the steady-state economy implies a level of economic activity considerably lower than that which prevailed before the recession, this bargaining over the value of production is something that should be facilitated and extended.
Sorry folks – I resisted for a while but eventually it had to go up. Partly the fault of Russ Roberts, one of the people behind Econtalk podcasts, one of the net’s best resources. Its actually exceptionally well produced!
1. A report by the Institute of Public Health on the health impacts of education
2. A useful data-page from the NBER
3. A report by the DIT Futures Academy on the University of the Future
4. A newspaper article from late last week on the UK unemployment situation, including the “hidden jobless”
5. Measurement Lab (M-Lab): an open, distributed server platform to advance network research and empower the public with useful information about their broadband connections.
6. The HEA page on the National Strategy for Higher Education in Ireland
7. The top ten internet passwords
Remember when the New York Times was casually referring to Paul Volcker as a “foot-dragger on bank deregulation“?
My how times have changed.
We’ve been discussing financial regulatory reform for well over a year now, and unfortunately, the discussion is still taking place at a very high level of abstraction. Of course, the real battles in financial regulation aren’t fought at the theoretical level, nor are they fought at the statutory level. The real battles are fought in comment letters on proposed and interim regulations, in SEC no-action letters, and in various (carefully selected) requests for exemptions. It’s not enough to say, “We should limit Wall Street’s risk-taking if they’re going to have access to the federal safety net.” At some point, people have to start getting specific about the wording of regulations they’d like to see, or about how specific existing regulations need to be changed.
Here, I’ll kick it off. Here are two specific regulatory changes I’d like to see. They both involve Reg W, so you just know they’re exciting. I don’t have a lot of time to explain the background (which some of you don’t need anyway), but this should give enterprising young financial reformers and legislative aides more than enough information to get them started. So without further ado:
1. Jesus H. Christ, can we please get someone to revise the derivatives exemption in Reg W so that derivatives are subject to the Section 23A limits? (And by “someone,” I mean “the Fed.”) The Section 23B limits — which generally require transactions between banks and their non-bank affiliates to be conducted on market terms — are clearly not enough. We need to swing the big bats when it comes to derivatives transactions between FDIC-insured banks and their non-bank affiliates, and that means the hard quantitative caps of Section 23A. If memory serves, the reason the Fed gave for exempting derivatives (other than credit derivatives, which weren’t exempted) from Section 23A was that there wasn’t enough evidence yet on the risks posed by derivatives transactions between banks and their non-bank affiliates. Still waiting for that evidence, are we?
2. Get rid of Reg W’s “ready market exemption,” and go back to the old “Wall Street Journal test.” Yes, I know some people thought the Fed didn’t go far enough with the ready market exemption, but they were wrong then and they’re wrong now. Pretty much every security has an electronic service that provides real-time data on price anymore, and the SEC is way too liberal with its definition of a “ready market.” The ready market exemption basically allowed some banks (I won’t name any names) to use their insured deposits to, shall we say, “support” some pretty crappy paper, like ABS and ABCP. And it wouldn’t take much for comparable securities to get back into that exemption. Let’s just go back to the old “Wall Street Journal test.” It was conservative and reasonably clear, which is exactly what we’re looking for in regulations governing large, complex financial institutions.
This isn’t the stuff op-eds are made of, but this is where all the action is. You can talk about moral hazard until you’re blue in the face — and then Wall Street will take your lunch money anyway, and they’ll do it in a comment letter on some proposed interim rules you weren’t even aware of.
Remember when the New York Times was casually referring to Paul Volcker as a “foot-dragger on bank deregulation“?
My how times have changed.
The next book club will be on Identity Economics, which I am working my through at present. No definite plans yet so I wont give this a separate post! A number of interesting NBER papers, only a couple of which are linked below. Feel free to send suggestions for links.
1. Andrew Leigh on SimpleTax – a behavioural solution to problems with tax filing
2. Dee and Jacob NBER working paper on the effects of a student plagariasm intervention
3. Jacob and Wilder NBER working paper on the role of expectations in educational attainment
4. Oswald and Wu IZA paper on match between subjective and objective measures of well-being
5. Batista and Vicente IZA paper on whether migrants improve domestic institutions by increasing the demand for accountability
6. Ronald Ehrenberg has a VOX-post on gender of academic leaders
This new meme among journalists is truly baffling:
One widely used strategy by the financial industry has been to deploy representatives of smaller high-street banks to make the case to lawmakers. Organisations such as the Independent Community Bankers of America tend to get a sympathetic hearing because they can point to members in towns and cities in almost every Congressional district, rather than purely in lower Manhattan.
Saying that Wall Street “deployed” community banks to do their bidding on Capitol Hill is beyond absurd. Community banks detest Wall Street. They’d sooner set their own branches on fire than lobby on the Street’s behalf. Seriously, this is the equivalent of saying that Walmart deployed the AFL-CIO to do its bidding on the Hill.
A lot of people, especially journalists, seem to have a very romantic view of community bankers — as if they’re all modern-day George Baileys or something. So when community banks come out strongly against something journalists like a great deal, like the Consumer Financial Protection Agency, it’s like it doesn’t compute. How could community banks be against something as obviously noble as the CFPA? (For the record, I’m for the CFPA.) So the answer they come to (entirely in their head, of course) is that Wall Street must be behind it somehow. Wall Street — which, as every good journalist knows, is pure concentrated evil — must be using community banks as a front. Of course!
Is Wall Street opposed to the CFPA? Meh. They’re not enthusiastic by any means, but it’s way down on their list of priorities. The CFPA will mean a lot more regulatory compliance, but banks like BofA and Chase can handle regulatory compliance issues relatively easily. The Street will happily trade their support for the CFPA for one of their bigger issues, I guarantee you.
In reality, community banks are violently opposed to the CFPA, because they’ll probably have to hire a couple additional people, at least, to handle the increased regulatory compliance work. (Stimulus!) For community banks, that’s a very big cost. And the truth of the matter is that community banks have far more sway on Capitol Hill than the Street. Think about it — community banks are in every Congressman’s district, and they tend to have a lot of influence at the district level. They’re the ones who killed the mortgage cramdown legislation, even after big banks like Citi had acquiesced. Just remember, all politics is local.
This new meme among journalists is truly baffling:
One widely used strategy by the financial industry has been to deploy representatives of smaller high-street banks to make the case to lawmakers. Organisations such as the Independent Community Bankers of America tend to get a sympathetic hearing because they can point to members in towns and cities in almost every Congressional district, rather than purely in lower Manhattan.
Saying that Wall Street “deployed” community banks to do their bidding on Capitol Hill is beyond absurd. Community banks detest Wall Street. They’d sooner set their own branches on fire than lobby on the Street’s behalf. Seriously, this is the equivalent of saying that Walmart deployed the AFL-CIO to do its bidding on the Hill.
A lot of people, especially journalists, seem to have a very romantic view of community bankers — as if they’re all modern-day George Baileys or something. So when community banks come out strongly against something journalists like a great deal, like the Consumer Financial Protection Agency, it’s like it doesn’t compute. How could community banks be against something as obviously noble as the CFPA? (For the record, I’m for the CFPA.) So the answer they come to (entirely in their head, of course) is that Wall Street must be behind it somehow. Wall Street — which, as every good journalist knows, is pure concentrated evil — must be using community banks as a front. Of course!
Is Wall Street opposed to the CFPA? Meh. They’re not enthusiastic by any means, but it’s way down on their list of priorities. The CFPA will mean a lot more regulatory compliance, but banks like BofA and Chase can handle regulatory compliance issues relatively easily. The Street will happily trade their support for the CFPA for one of their bigger issues, I guarantee you.
In reality, community banks are violently opposed to the CFPA, because they’ll probably have to hire a couple additional people, at least, to handle the increased regulatory compliance work. (Stimulus!) For community banks, that’s a very big cost. And the truth of the matter is that community banks have far more sway on Capitol Hill than the Street. Think about it — community banks are in every Congressman’s district, and they tend to have a lot of influence at the district level. They’re the ones who killed the mortgage cramdown legislation, even after big banks like Citi had acquiesced. Just remember, all politics is local.
We’ve been discussing financial regulatory reform for well over a year now, and unfortunately, the discussion is still taking place at a very high level of abstraction. Of course, the real battles in financial regulation aren’t fought at the theoretical level, nor are they fought at the statutory level. The real battles are fought in comment letters on proposed and interim regulations, in SEC no-action letters, and in various (carefully selected) requests for exemptions. It’s not enough to say, “We should limit Wall Street’s risk-taking if they’re going to have access to the federal safety net.” At some point, people have to start getting specific about the wording of regulations they’d like to see, or about how specific existing regulations need to be changed.
Here, I’ll kick it off. Here are two specific regulatory changes I’d like to see. They both involve Reg W, so you just know they’re exciting. I don’t have a lot of time to explain the background (which some of you don’t need anyway), but this should give enterprising young financial reformers and legislative aides more than enough information to get them started. So without further ado:
1. Jesus H. Christ, can we please get someone to revise the derivatives exemption in Reg W so that derivatives are subject to the Section 23A limits? (And by “someone,” I mean “the Fed.”) The Section 23B limits — which generally require transactions between banks and their non-bank affiliates to be conducted on market terms — are clearly not enough. We need to swing the big bats when it comes to derivatives transactions between FDIC-insured banks and their non-bank affiliates, and that means the hard quantitative caps of Section 23A. If memory serves, the reason the Fed gave for exempting derivatives (other than credit derivatives, which weren’t exempted) from Section 23A was that there wasn’t enough evidence yet on the risks posed by derivatives transactions between banks and their non-bank affiliates. Still waiting for that evidence, are we?
2. Get rid of Reg W’s “ready market exemption,” and go back to the old “Wall Street Journal test.” Yes, I know some people thought the Fed didn’t go far enough with the ready market exemption, but they were wrong then and they’re wrong now. Pretty much every security has an electronic service that provides real-time data on price anymore, and the SEC is way too liberal with its definition of a “ready market.” The ready market exemption basically allowed some banks (I won’t name any names) to use their insured deposits to, shall we say, “support” some pretty crappy paper, like ABS and ABCP. And it wouldn’t take much for comparable securities to get back into that exemption. Let’s just go back to the old “Wall Street Journal test.” It was conservative and reasonably clear, which is exactly what we’re looking for in regulations governing large, complex financial institutions.
This isn’t the stuff op-eds are made of, but this is where all the action is. You can talk about moral hazard until you’re blue in the face — and then Wall Street will take your lunch money anyway, and they’ll do it in a comment letter on some proposed interim rules you weren’t even aware of.
The New York Times has an interesting piece by Richard Thaler on the rational decision (strategic default) to stop paying a mortgage by households that are seriously “underwater” (in negative equity to us Irish folks). The focus is particularly on states in the US where nonrecourse mortgages are the norm. These are loans where the only liability recurring to the borrower is the house itself. There is also an interesting discussion of the contagion effects of defaulting, in that it may only be when people perceive defaulting to have lost some of its social stigma that a new larger wave of defaults will begin. One thought-provoking solution put forward by a Law Professor and Economist from Chicago involves a loan modification system, where banks would be forced to renegotiate mortgage payments so that the borrower would only pay a mortgage based on something like the new decimated market value of the property.
I imagine the discussion of strategic defaults is less relevant to Ireland given our tougher bankrupcy laws etc, although anyone with more knowledge of that system is welcome to correct me. The loan modification idea is surely something that could be taken on stream to help those in Ireland that took out mortgages around 2006/07.
While Google’s Fusion Tables may not appeal to professional researchers who are conscious of data-security, there are some useful features which may appeal to beachelor’s and master’s students working on group projects. These include:
- Upload small or large data sets from spreadsheets or CSV files.
- Visualize your data on maps, timelines and charts.
- Pick who can access your data; hide parts of your data if needed.
- Merge data from multiple tables.
- Discuss your data with others. Track changes and discussions.
It is clear that the problems facing the world economy have their origin in the financial system and that the curbs on bank powers proposed by Obama, significant as they are in a country where financial interests are so powerful, are insufficient and misdirected. What we need is not a behaviour management programme but a democratised system that serves the interests of all the world’s people. Since the problems of the post-war period have resulted from too much US power – especially in global finance – it is unlikely that a solution is going to emerge from the President of the United States.
This is made heart-warmingly clear in a lucid and congent book that I have been enjoying recently: Unholy Trinity: The IMF, World Bank and WTO by Richard Peet. Like others I have been waffling on about the need for a new Bretton Woods without feeling entirely confident about the workings of the system that has proved itself to be so wrong. Professor Peet has been spending his time cutting through the verbiage and obfuscation of the financiers and has now presented his understanding in this excellent book.
From the travails of the 1930s that led to the conviction that politicians must take control of finance, through the weary Bretton Woods negotiations and the even wearier surrender by the war-ravaged European to US domination, Peet maps out the path we trod to arrive at a system where capital is supreme as never before – in spite of its clearly demonstrated incompetence and destructiveness. For those with a taste for abstract concepts like securitization and who thirst to fully understand the workings of a special drawing right, I can promise that you too will be satisfied by the thorough research and clarity of writing. Peet has no interest in demonstrating how smart he has been to work all of this out: his intention is to help us all to follow his lead so that our proposals for change will be better informed and more powerful as a result.
As with many books that arise from the left, this one is weak on prescriptions. But perhaps that itself is appropriate. We are clear about the need for the reclaiming of power over capital for the world’s citizens, and the need for a new international negotiation to establish a world economic framework based on the twin principles of sustainability and equity. Beyond this we surely need the humility to listen to those of the world’s people who are not responsible for the spectacular mess the smart guys in the west have gotten us into.
Not surprisingly, one of the reporters on this story is Bloomberg’s Chief Hyperbolist, Hugh Son. Someone really needs to stick an editor on that guy. It’s getting embarrassing to watch.
“I asked Chairman Bernanke how much time his board of governors spent on regulatory affairs: Was it 1 percent, 2 percent, 10 percent? And he never gave us even an answer. It was 1 percent. So I'm not going to support the Fed chairman.”
OK, I’ll bite. If he never gave you an answer, how do you know it was 1 percent?
Not surprisingly, one of the reporters on this story is Bloomberg’s Chief Hyperbolist, Hugh Son. Someone really needs to stick an editor on that guy. It’s getting embarrassing to watch.
“I asked Chairman Bernanke how much time his board of governors spent on regulatory affairs: Was it 1 percent, 2 percent, 10 percent? And he never gave us even an answer. It was 1 percent. So I'm not going to support the Fed chairman.”
OK, I’ll bite. If he never gave you an answer, how do you know it was 1 percent?
