Month: April 2016

Can We Prove a Bank Guilty of Creating Systemic Risk?

That is a new paper by Jon Danielsson, Kevin R. James, Marcela Valenzuela, and Ilknur Zer, forthcoming in the JMCB, here is the abstract:

Since increasing a bank’s capital requirement to improve the stability of the financial system imposes costs upon the bank, a regulator should ideally be able to prove beyond a reasonable doubt that banks classified as systemically risky really do create systemic risk before subjecting them to this capital punishment. Evaluating the performance of two leading systemic risk models, we show that estimation error alone prevents the reliable identification of the most systemically risky banks. We conclude that it will be a considerable challenge to develop a riskometer that is both sound and reliable enough to provide an adequate foundation for macroprudential policy.

Here is their broader piece on models of systemic risk.  Paul Krugman had a good argument today in his column on this topic:

What determines whether a firm is systemically important? There aren’t any cut-and-dried rules — there can’t be, because if there were, corporate lawyers would find ways to evade them. Instead, it’s a judgment call. But financial giants that don’t like being regulated are trying to use litigation to question those judgments.

Maybe, but I’m reluctant to define “following the law” as necessarily an attempt to game the system.  Would we use that same argument to show restrictions on leverage are counterproductive?  Quantifiable laws can indeed limit financial risk and of course Dodd-Frank, and many other financial regulations, is replete with such quantifiable laws.  Why is quantification suddenly so ineffective or even counterproductive?  We don’t from Dodd-Frank advocates hear much about this possibility in other contexts.  Furthermore, cannot the discretionary judgments of the regulators be gamed, and gamed all the more so?  Especially in generations two, three, and four of this process.  Especially in a world with a revolving regulatory door.  Especially in a world where regulators are looking for cover and, in subsequent iterations, may simply fall back on numerical standards in any case?  I say when in doubt, go with the rule of law, not the rule of men.

So I’m sticking with my previous view that the MetLife decision is more good news than bad.

Monday assorted links

Place plays a part in helping the poor live longer

There is a new Raj Chetty paper out in JAMA ( with seven co-authors, including David Cutler), and it is garnering a lot of media attention.  Here is to my mind the main result, although it is not being presented as such (NYT here):

The JAMA paper found that several measures of access to medical care had no clear relationship with longevity among the poor. But there were correlations with smoking, exercise and obesity.

I enjoyed the NYC angle from Margot Sanger-Katz:

New York is a city with some of the worst income inequality in the country. But when it comes to inequality of life spans, it’s one of the best.

Impoverished New Yorkers tend to live far longer than their counterparts in other American cities, according to detailed new research of Social Security and earnings records published Monday in The Journal of the American Medical Association. They still die sooner than their richer neighbors, but the city’s life-expectancy gap was smaller in 2014 than nearly everywhere else, and it has shrunk since 2001 even as gaps grew nationwide.

That trend may appear surprising. New York is one of the country’s most unequal and expensive cities, where the poor struggle to find affordable housing and the money and time to take care of themselves.

But the research found that New York was, in many ways, a model city for factors that seem to predict where poor people live longer. It is a wealthy, highly educated city with a high tax base. The local government spends a lot on social services for low-income residents. It has low rates of smoking and has many immigrants, who tend to be healthier than native-born Americans.

Here is the accompanying NYT graphic about “your county.”  Here is Emily Badger and Christopher Ingraham, good graphics too:

The poor live shorter lives in Las Vegas, Louisville and industrial Midwest towns, such as Gary, Ind. Geography also matters much more for the poor than the rich. The health behaviors of the wealthy are similar wherever they live. For the poor, their likelihood of risky behaviors such as smoking depends a great deal on geography, on whether they live in a place where smoking is common or where, as in San Francisco, cigarettes have been shunted out of view.

It’s almost as if health care policy should be local in orientation.  The link to the paper includes three comments, including one by Angus Deaton.

Is Brexit just a lot of political theatre?

Yet Britain looks unlikely to exit Europe even if its citizens voted to do so. Instead, the government would probably do just what EU members — Denmark, France, Ireland and the Netherlands — have always done after such votes. It would negotiate a new agreement, nearly identical to the old one, disguise it in opaque language and ratify it. The public, essentially ignorant about Europe, always goes along.

In contemplating this possibility, leading Eurosceptics have shown themselves to be the craftiest political illusionists of all. Now that Brexit appears within their grasp, they are backing away from it. What they really seek is domestic political power. If Britain votes to leave, the government will fall or, at the very least, the cabinet will be reshuffled. For Eurosceptic backbenchers, this is a once-in-a-lifetime opportunity. Yet they lack parliamentary and popular majorities to govern alone. They would have to strike a deal, which means moderating anti-European demands — all amid post-referendum economic chaos. Renegotiation inside the EU would be almost inevitable.

That is from Andrew Moravcsik at the FT.  I sometimes refer to Brexit as “the Donald Trump of England.”  The problem is that while Trump has been falling in prediction markets — down to below fifty percent for the nomination as of latethe chances for Brexit are rising and furthermore Vladimir Putin stands at the other end of the bet.

David Beckworth is starting a money/macro podcast series

David writes to me:

Today is the launch of a new podcast series on macroeconomics called Macro Musing and I am privileged to be the host. Each week, with the help of a special guest, we will get to explore in depth various macroeconomic topics. If want to go all wonky on macro this is the podcast for you!

So far I have recorded podcasts with the following guests: Scott Sumner, John Taylor, John Cochrane, Cardiff Garcia, Miles Kimball, Ramesh Ponnuru, and George Selgin. There have been a lot of interesting conversations covering topics such as the origins of the Great Recession, the safe asset shortage problem, negative interest rates, the fiscal theory of the price level, the Eurozone Crisis, Abenomics, the Great Depression, China’s economic problems, and alternative monetary regimes. In addition to these interesting topics, I have enjoyed learning how each guest got into macro, either as an academic or journalist, and how they see the field changing over time as new ideas and new technology emerge. I think you will find it fascinating too.

More guest are scheduled, including some Fed officials, but I would love to hear from you on what guests and topics you would like to see on the show. My first guest is Scott Sumner with whom I discuss his views on the Great Recession, NGDP targeting, and his new book on the Great Depression, The Midas Paradox.

I hope to make this a long-term project, but it success depends in part on you subscribing. So please subcribe via itunes or your favorite podcast app and spread the word. Let’s make this podcast a success together and who knows, maybe we can help make the world a better place.

*The Complete Review Guide to Contemporary World Fiction*

That is the new book by M.A. Orthofer, out soon this April.  If you measure book quality by the actual marginal product of the text, this is one of the best books written, ever.  Reading the manuscript in draft form induced me to a) write an enthusiastic blurb, and b) order about forty items through Amazon, mostly used of course.  The book is basically a comprehensive guide to what is valuable and interesting in recently translated world literature, a meta-book so to speak, with extensive coverage of most of the countries you might want.

Here is the book’s home page.  Here is a superb New Yorker profile of Orthofer, who writes the blog Literary Saloon.  Highly recommended to avid readers of fiction.

How to Bring Prosperity to Iran

I was pleased to be one of a group of economists asked to publish a letter to Iran in the New Year’s issue of Tejarat-e Farda, an Iranian business weekly. The issue features messages from economists around the word.

Here is my letter:

TabarrokIranHappy Nowruz! I celebrate today not only a New Year but what I hope will be a new beginning. Political differences have cut Iran, long a center of world trade and commerce, from the world economy. As a result, the Iranian economy has performed for a generation or more well below its potential. But Iran has great national resources and could experience an explosion of prosperity if it adopts the right institutions.

Turkey and Iran once had similar standards of living but GDP per capita today is more than twice as high in Turkey as in Iran. On the World Bank’s Ease of Doing Business Index, Turkey is not a world leader, it ranks just 55th in the world (Singapore ranks 1st), but Iran ranks only 118th out of 189 countries.

Iran, however, is moving in the right direction. Privatization of state enterprises, when combined with competitive and open markets, will improve efficiency and innovation. Greater experience with private markets and commercial law also hold the promise of building a more secure foundation for property rights, especially for foreign investors. With the right business climate, billions of dollars could flow to Iran including many billions from successful Iranians who live in the United States and around the world.

The United Arab Emirates provides an interesting model. The UAE has the best business climate in the region and its reputation for security of property has allowed the UAE to attract investment from all over the world including at least $200 billion from investors of Iranian heritage. The government of the UAE takes pride in its business climate and they have used international benchmarks to attract investment and measure their own achievements. It’s remarkable that in their vision document the UAE explicitly aims to be the number one ranked country on the World Bank’s Ease of Doing Business Index by 2021. Iran could similarly set goals and mark achievements using international benchmarks such as the Ease of Doing Business Index, the Global Competitiveness Index and the Transparency Index.

The size of the Iranian market makes it attractive to foreign investors as does the sophistication of the Iranian consumer. Iran has a great history of investment in education and its population is among the best educated in the region. Iran is well poised to succeed in information technology and internet startups especially if it offers guarantees and protections for free movement of information.

Iranians have a long history of entrepreneurship and trade, they are among the best educated people in the region, and there is a large Iranian community in the world who would like to invest in their homeland. Iran has strong foundations and with the right institutions it could achieve a prosperity takeoff that would be welcomed by Iranians as well as by the many people around the world who wish the best for the Iranian people in the community of nations.

Should MetLife be designated “too big to fail”?

Here is one summary of the latest:

The nation’s biggest life insurance company isn’t “too big to fail” after all — at least in the eyes of a federal judge, said Renae Merle in The Washington Post. In a “significant setback” for the Obama administration’s financial reform efforts, MetLife last week won a landmark lawsuit over its designation as a “systemically important financial institution.” Prior to the 2008 crash, large, non-bank financial firms were subject to little oversight, but after the near collapse of insurance giant AIG, federal regulators decided tougher rules were necessary. So the government labeled MetLife, which has 100 million customers worldwide, and three other non-banks — AIG, Prudential, and General Electric’s financing arm — as too big to fail, requiring them to set aside bigger financial cushions to ward off collapse. But MetLife challenged the label in court, and to the surprise of many, it won.

That’s four non-banks, identified in discretionary fashion by the regulators without a cost-benefit analysis or fully objective standards for such a designation.  Not three, not five, rather four.  And with exactly what standards of regulatory appeal?  A thirty day appeal process?  Once you are on that list, I believe it is politically very difficult for the Financial Stability Oversight Council to take you off.  The regulators are not required to spell out any clear “exit strategy” for leaving the list.

Is this such a good idea?  You don’t have to favor “doing nothing” to think this idea of a “tag, you’re it” game might be counterproductive.  I am reminded of the wise words of Paul Krugman that a lot of crises can come from surprise corners and bring higher contagion costs than you might have expected.  And the whole point of systemic risk and mispriced asset classes is that such problems can affect the entire market, or an entire sector of the market, all at once.  Big firms or not.  (It is weird for regulators to simultaneously believe that breaking up big institutions would increase market risk, and then focus their monitoring on…the biggest institutions.)  What about money market funds, while we are on the topic?  It’s not about the size of the biggest one.

That all suggests it is better to build safeguards into the system at a general level, rather than playing the tag game.  Those safeguards can include corporate governance reform, better Fed monitoring of credit markets, better stress tests, better overall money market infrastructure and crisis procedures, and better monetary policy in downturns, among other ideas.

If you impose higher capital requirements on four relatively well-observed firms, you might just be pushing risk into other and less well-observed corners of the financial system.

On Twitter, Austan Goolsbee is very upset about this ruling.  Jack Lew has been described as “furious.”

I say it’s a blessing in disguise.  Any regulatory system whose success relies on singling out four firms is a system bound to fail.

snoopy

Addendum: Here is a relevant article by Cass Sunstein.

How obscure is Rhode Island?

Here is Ann Althouse on Rhode Island:

I had to make a new tag for Rhode Island. I think it’s the very last state I’ve blogged about — I’d thought I already had a tag for every state — and it’s a story of it not getting respect. Oh, Rhode Island. You can use that previous sentence as your slogan if you want.

Or remember the old saying “Nothing but for Providence”?

It’s not even an island.  How is this for a relevant update?:

The idea was simple enough — to create a logo and slogan that cast the long-struggling state of Rhode Island in a fresh, more optimistic light to help attract tourists and businesses. A world-renowned designer was hired. Market research was conducted. A $5 million marketing campaign was set. What could go wrong?

Everything, it turns out.

The slogan that emerged — “Rhode Island: Cooler and Warmer” — left people confused and spawned lampoons along the lines of “Dumb and Dumber.” A video accompanying the marketing campaign, meant to show all the fun things to do in the state, included a scene shot not in Rhode Island but in Iceland. The website featured restaurants in Massachusetts.

By the way, they hired a New Yorker to do the campaign.

And yet, as a native northeaster who spent three years of his early life in Fall River (southern Massachusetts), I cannot bring myself to name Rhode Island the nation’s most obscure state.  It just doesn’t seem far away enough.  Brown University is world famous, and most people who go from New York to Boston come in contact with the state in some way.  It can count Gilbert Stuart and Cormac McCarthy and H.P. Lovecraft, and the film Dumb and Dumber starts off there, so probably it is no worse (better?) than the nation’s second most obscure state.

Will poets program your bots?

Here is the latest from Silicon Valley:

As tech behemoths and a wave of start-ups double down on virtual assistants that can chat with human beings, writing for AI is becoming a hot job in Silicon Valley. Behind Apple’s Siri, Amazon’s Alexa and Microsoft’s Cortana are not just software engineers. Increasingly, there are poets, comedians, fiction writers, and other artistic types charged with engineering the personalities for a fast-growing crop of artificial intelligence tools.

…a new crop of virtual assistant start-ups, whose products will soon flood the market, have in mind more ambitious bots that can interact seamlessly with human beings.

Because this wave of technology is distinguished by the ability to chat, writers for AI must focus on making the conversation feel natural. Designers for Amazon’s Alexa have built humanizing “hmms” and “ums” into her responses to questions. Apple’s Siri assistant is known for her wry jokes, as well as her ability to beatbox upon request.

As in fiction, the AI writers for virtual assistants dream up a life story for their bots. Writers for medical and productivity apps make character decisions such as whether bots should be workaholics, eager beavers or self-effacing. “You have to develop an entire backstory — even if you never use it,” Ewing said.

Even mundane tasks demand creative effort, as writers try to build personality quirks into the most rote activities. At the start-up x.ai, a Harvard theater graduate is tasked with deciding whether its scheduling bots, Amy and Andrew, should use emojis or address people by first names. “We don’t want people saying, ‘Your assistant is too casual — or too much,’ ” said Anna Kelsey, whose title is AI interaction designer. “We don’t want her to be one of those crazy people who uses 15 million exclamation points.”

Here is the full story.

I want to talk to a random Swede

Northern lights, darkness, meatballs and suicide rates are just some of the suggested topics of conversation for a new hotline backed by the Swedish Tourist Association.

Launched this week, call +46 771 SWEDEN from anywhere in the world and you’ll be connected to a random Swede. The service honours the 250th anniversary of the country abolishing censorship and hopes to “connect people in troubled times.”

Here is the full story, which includes a taped conversation with a Swede (but is he random?), via Michelle Dawson.

Long distance charges may apply.

And via Samir Varma, here is one story of someone who called and spoke with a Ugandan.

Was it wrong to hack and leak the Panama Papers?

Let’s say a group of criminal defense lawyers kept a database of their confidential conversations with their clients.  That would include clients charged with murder, robbery, DUI, drug abuse, and so on.  In turn, a hacker would break into that database and post the information from those conversations on Wikileaks.  Of course a lot of those conversations would appear to be incriminating because — let’s face it — most of the people who require defense attorneys on criminal charges are in fact guilty.  When asked why the hack was committed, the hacker would say “Most of those people are guilty.  I want to make sure they do not escape punishment.”

How many of us would approve of that behavior?  Keep in mind the hacker is spreading the information not only to prosecutors but to the entire world, and outside of any process sanctioned by the rule of law.  The hacker is not backed by the serving of any criminal charges or judge-served warrants.

Yet somehow many of us approve when the victims are wealthy and higher status, as is the case with the Panama Papers.  Furthermore most of those individuals probably did nothing illegal, but rather they were trying to minimize their tax burden through (mostly) legal shell corporations.  Admittedly, very often the underlying tax laws should be changed, just as we should repeal the deduction for mortgage interest too.  But in the meantime we are not justified in stealing information about those people, even if some of them are evil and powerful, as is indeed the case for homeowners too.

Once again, politics isn’t about policy, it is about which groups should rise and fall in relative status.  And many people believe the wealthy should fall in status, and so they will entertain the morality of all crimes and threats against them.  These revelations will of course lead to some subsequent cases of blackmail, against Chinese officials for one group.

I had tweeted “Are your views on privacy and consistent? Just asking…” and my goodness what a response, positive and negative.  Most interesting of all, many people had never pondered the question before.  Somehow “good things” such as “privacy” and “transparency” cannot stand in such conflict because all good things, like all bad things, must come together.

Here is a good Kaddim Shubber discussion on FT Alphaville.

Here is Veronique de Rugy on the Panama Papers.

Here is Ray Lopez on the same:

1.  There’s a tension between US and foreign law firms and FATCA (United States Foreign Account Tax Compliance Act (FATCA) has the objective of reducing tax evasion by American taxpayers with foreign accounts).  This is because law firms are exempt from reporting on clients past crimes, not future crimes, however, money laundering is considered a future crime.  When a known criminal is setting up an offshore account with the help of a law firm, is the law firm an accessory to money laundering or not?  The better view is they are not:  it’s up to the client to report any offshore account to the government, and not the law firm’s responsibility.  That’s the better view, but see point #2, which rebuts this.

2.  There’s a tension between client confidentiality and tax treaties.  Check this out: https://www.lawsociety.org.nz/practice-resources/practice-briefings/FATCA-and-New-Zealand-Law-Firms.pdf   In New Zealand, which is probably representative of others, a passive non-financial foreign entity–which almost always will be a law firm trust account holding money from a client–has a duty under FATCA to report on the client to the US government (“know your customer” is the buzz phrase banks use, which as you know already are required to ‘spy’ on their customers).

Both points 1, 2 are relevant for the conduct of the law firm of Mossack Fonseca.  Except for the alleged destruction of evidence by them, I don’t see them doing anything that bad (by law firm standards; remember, any law firm of decent size has former crooks as clients, and for a firm in Panama I would say that’s not the exception but the rule!)
Did you know the Guardian media firm is closely connected to shell companies?  According to the FT: “…even the World Bank and other development finance institutions used offshore investment hubs, in a sign they have come to play “a systemic role in international investment flows”.”  Speaking of the FT, Tim Harford suggests some useful tax reforms.

From the comments
, here is Kai:

I practice law in cross-border banking and finance in China. I am puzzled by how non-professionals in this field view offshore jurisdictions as categorically related to criminal activity, embezzlement and corruption, etc.

Almost all cross-border transactions involve offshore jurisdictions at some level. For instance most companies listed on the HK stock exchange are incorporated in the Cayman Islands. Anything to do with Bermuda, Cayman, BVI, etc. in cross border transactions is very, very mundane.

According to the papers, Xi Jinping has relatives who are owners of offshore companies. How is that any sort of evidence of wrongdoing by them (much less of Xi Jinping)? I doubt anyone can provide an intelligent answer.

Maybe yes, maybe no, but I don’t see that the people rendering judgment know more about it than he does.

Liberia is outsourcing primary schools to a start-up backed by Mark Zuckerberg

In 2013, after all 25,000 high school students sitting state university entrance exams failed, Liberian President Ellen Johnson Sirleaf admitted that the education system was “a mess” and called for a complete overhaul.

Now it seems Sirleaf’s government has decided that rather than overhauling the education system themselves, they’re going to pay someone else to do it for them. Under a pilot program called “Partnership Schools for Liberia,” the Liberian government will outsource some of its primary and early childhood educational system to private companies over the next five years.

One huge contract has gone to a private company called Bridge International Academies — reportedly to the tune of $65 million. And it’s causing some real controversy.

The United Nations’ Special Rapporteur for the right to education, Kishore Singh, has denounced the plan as “completely unacceptable” and “a blatant violation of Liberia’s international obligations under the right to education.” A coalition of teachers unions and civil society groups in Liberia issued an open letter announcing their opposition. Education International, an international federation of unions, has warned that “privatisation vultures” involved in the plan “pose [a] serious threat to Liberia’s public education system.”

…Bridge’s “academy in a box” model has attracted investment from Facebook’s Mark Zuckerberg and the World Bank Group’s International Finance Corporation, which invested $10 million each. Bill Gates and the UK government’s Department for International Development are also investors.

Here is the Vox story.   As they say, big steps toward a much better world…

Here is coverage from prior efforts in Kenya, hat tips go to Dani Rodrik and Alex T.