"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Thursday, April 1, 2010

Really great links - narrow banking is not banking - human capital - USA vs. Western Europe - banksters

Paul Krugman - narrow banking - shadow banking - "I think of the whole bank regulation issue in terms of Diamond-Dybvig, which sees banks as institutions that allow individuals ready access to their money, while at the same time allowing most of that money to be invested in illiquid assets. That’s a productive activity, because it allows the economy to have its cake and eat it too, providing liquidity without foregoing long-term, illiquid investments. If you were to enforce narrow banking, you would be denying the economy one of the main ways we manage to reconcile the need to be ready for short-term contingencies with the payoff to making long-term commitments.
Where Greg goes astray here, I think, is by trying to apply Modigliani-Miller, which says that capital structure doesn’t matter. If you look at the assumptions behind that argument, you realize that it requires that all assets be perfectly liquid. They aren’t, of course — and that’s precisely why we need banks.
And anyway, how would you enforce it? Yes, you could require that depository institutions be narrow banks — but depository institutions aren’t where the problem is. The recent crisis was centered in repo — and as Gary Gorton (and others) insist, repo — overnight loans in which many businesses park their funds — are money just as much as bank deposits are. And if depository institutions were forced to be narrow banks, even more funds would migrate to shadow banks. So would you try to ban repo? Where does it stop?"

Frances Woolley - human capital - "Whether or not human capital theory is true determines the best response to the demographic challenges much discussed this blog. If education makes people more productive, then more education can increase the productivity of our economy – possibly enough so that fewer workers are able to support the large number of pensioners. If, however, education is basically about sorting workers – if people are getting more and more degrees in hope of eventually capturing that one elusive stable professional job with benefits – then the best way of responding to the demographic crisis is to scale back post-secondary education. Doing so would effectively increase the size of the working age population substantially, easing demographic problems."

Scott Sumner - USA vs. Western Europe - "When I started studying economics the US was much richer than Western Europe and Japan, but was also growing more slowly than other developed countries. They were still in the catch-up growth phase from the ravages of WWII. But since Reagan took office the US has been growing faster than most other big developed economies, and at least as fast in per capita terms. They’ve plateaued at about 25% below US levels, when you adjust for PPP. This is the steady state. The big question is why.
Take a look at the data for Germany and Italy. On average they collect .416 of GDP in taxes, as opposed to the .282 ratio in the US. And yet the average amount collected is only slightly higher than US tax revenues.
Here’s the $64 dollar question for which I’ve never seen progressives provide a satisfactory answer. Why is per capita GDP in Western Europe so much lower than in the US? Mankiw seems to imply that high tax rates may be one of the reasons. I don’t know if that’s the answer, but if it’s not my hunch is that the factors that would explain the difference are other government policies that the left tends to favor (strong unions, higher minimum wages, more regulation, generous unemployment insurance, etc.) So I think Mankiw is saying that if we adopt the European model, there really isn’t a lot of evidence that we’d end up with any more revenue than we have right now. Further evidence for this hypothesis is that the few developed countries that do have much lower tax rates than the US (Hong Kong and Singapore) now have much higher per capita GDPs (PPP) than Western Europe. Yes, they are small and urban, but Western Europe is full of small countries of about 6 million people that have less than 5% of the population in farming.
Of course the progressives’ great hope is that we’ll end up like France. But Brazil also has high tax rates, how do they know we won’t end up like Brazil? For those who like cultural explanations, I’d point out that the US has many people of Spanish, Italian, German and British descent, but not many of French descent. And those 4 European countries raise about as much revenue as the US, but with much higher tax rates and much lower incomes."

Interfluidity - "I myself don’t use the term “banksters”. And I sympathize with TED. I like financial industry professionals, personally. I enjoy meeting bankers. They are usually smart, interested in the arcane crap I’m interested in, and assholes of the sort that I enjoy sparring with. Bankers are great fun, and they are not bad people.
But we are who we are collectively as well as individually. Large organizations can and do evolve to do evil things while isolating people individually from illegal or morally uncomfortable acts. That capacity can confer tremendous advantages over smaller, more personal and accountable, collectives. It’s harsh, but we don’t get a pass just because the particular lever we are paid to pull only shifts a cog in a vast machine whose overall function we don’t control. As moral agents, it is not enough to follow the law and let pecuniary incentives guide us. We have to take responsibility for the behavior of the collectives to which we belong.
Calling out misdeeds by hard names helps. Words like “looting”, “theft”, “fraud”, and “scam” are fair descriptions of a lot of common practices, even if some of the perpetrators worked 18 hour days putting together pages 120 through 237 of mind-numbing prospecti and meant only to earn a living."

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