Political Credit Cycles

This paper integrates theories of political budget cycles with theories of tactical electoral redistribution to test for political capture in a novel way. Studying banks in India, I find that government-owned bank lending tracks the electoral cycle, with agricultural credit increasing by 5-10 percentage points in an election year. There is significant cross-sectional targeting, with large increases in districts in which the election is particularly close. This targeting does not occur in non-election years, or in private bank lending. I show capture is costly: elections affect loan repayment, and election year credit booms do not measurably affect agricultural output.

That's from a new paper (free here) by Shawn Cole in the premier issue of the American Economic Journal: Applied Economics.  Need I explain the relevance?


Lucky this isn't an election year. But does it explain last years' credit boom?

ethics free republican hack!!! How dare anyone challenge the ability of politics to create socially optimal outcomes.hahhahahahha

The debate is among:

1. Giving banks enough money to recapitalize themselves, giving bank shareholders free money.
2. Nationalizing banks and reselling them within a relatively short time, which then MAY result in some political sales of assets.
3. Letting them fail and seeing our economy tank along with them.

Having long term nationally owned banks is a bad idea. We are not debating that idea with the current nationalization plans.

We have bad choices today because we de-regulated the leverage restrictions a few years back. Probably the least bad choice, the one with the least moral hazard and arguably the most fair to the U.S. taxpayer, is nationalization.

"reselling them within a relatively short time"

and you think a government with a commitment that forces them to sell after a certain amount of time is going to get a good deal?

A better deal than we have already received with the tarp money and a much better deal than just giving them $4t to take all of the bad assets while the U.S. taxpayer gets nothing but the bill. At least with nationalization, we get to look at everything, not just what the banks show us.

If we do not nationalize, it will cost us at least $1T more cash money to bail out the banks. There is no way to evaluate the banks "assets". The accounting is too complex and there is too much of it to reasonably do with any size accounting staff.

Therefore, we will have to take their word on what is a bad asset and what was and should be part of the new "bad bank". This is a recipe to shove every bad trade or even losing part of a hedge trade into the bad bank, even if it had nothing to do with the crisis and should not have anything to do with the bad bank.

Evidence: once nationalization was semi-moved off of the table, all of a sudden there are $4t of losses, instead of 1.5T last week. What a crock.

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"reselling them within a relatively short time"

and you think a government with a commitment that forces them to sell after a certain amount of time is going to get a good deal?

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