Should the large banks be broken up?
Here is one piece of evidence which says no. The bottom line seems to be that large banks are better at mobilizing capital internationally:
An essential step to see if this view has ground is analysing how multinational banks have been faring in the months of the crisis, in comparison to domestic banks. Given the key role of these multinational banks in supporting the real economy, whether their subsidiaries in host countries have been restraining the amount of resources provided to local residents during the recession.
In a recent paper prepared for the Economic Policy panel in Madrid (Barba Navaretti et al. 2010), we provide both aggregate and micro evidence that multinational banks have actually contributed to the stabilisation of financial markets in Europe and to the provision of credit to the real economy (notwithstanding the systemic nature of the crisis).
The aggregate banking statistics of the Bank for International Settlements show that the total local claims held by the affiliates (branches and subsidiaries) of multinational banks in host countries in Europe have been stable and even increasing between the beginning of 2007 and the third term of 2009, both in absolute terms and normalised by GDP or total financial activities (Figure 1 for total local claims in local currency). Claims have been rising also in the major Central and Eastern European Countries where foreign banks account for the dominant share of total banking activities. This pattern is consistent with broader worldwide evidence.
Here is the conclusion:
Contrary to popular belief, our results show that a world with only small and domestic banks is no safer. Rather, we show that the size and the global extensions of the activities of multinational banks positively contributed to hedging the downturns of the crisis, even in transition economies.
The call
Bloomberg offers up this piece of not very surprising news:
European Union finance ministers pledged to stiffen sanctions on high-deficit countries and ruled out setting up a mechanism to manage state defaults, saying no euro country will be allowed to renege on its debts.
I view this as the number one policy question facing the global economy today. Do you favor patches to keep the current system up and running, or do you think we need an as-smooth-as-possible combination of defaults and devaluations? I fall into the latter camp and I believe that no such feasible patches exist. I believe that Hayek — not of The Road to Serfdom but rather the critic of rationalist constructivism — is being vindicated more and more every day. Do any current European leaders understand his perspective? We will see.
Which path shall it be? What's your call?
From Angus, here are some harsh words, but on spending I cannot say that I disagree. I am often a Keynesian methodologically, yet in practice I am usually quite skeptical of fiscal policy.
Assorted links
How will Greece get off the dole?
My NYT column is here, here is an excerpt:
Consider the World Bank’s Doing Business index, which ranks countries according to the quality of their regulatory environment for commerce. The index places Greece at No. 109, just behind Egypt, Ethiopia and Lebanon. For the category of “high-income countries,” the Greek ranking is next to last, ahead of only Equatorial Guinea, which has oil wealth.
Greece has a malfunctioning fiscal system in which the shadow economy is estimated to be roughly 20 to 30 percent of the reported economy and tax evasion may run at $30 billion a year. Simply collecting taxes that are legally due would help bring Greece’s books into balance, yet even this simple remedy does not appear imminent.
As the World Bank index suggests, government funds are often spent hindering production rather than supporting it. This gives one clue as to why the numbers make Greece appear richer than it really is. Public expenditures are valued at cost when measuring gross domestic product, yet arguably the quality of Greek public services, per dollar spent, is less than that of many wealthy countries. Nonetheless Greece plunged ahead and joined the euro zone in 2001, with some unfortunate consequences.
A few scattered points which did not make it into the column:
1. Count the economic collapse of Greece as an intellectual victory for Douglass North and his brand of "institutions matter" economics.
2. I don't see any reason why a narrower Eurozone has to collapse.
3. Greece with a default and a floating exchange rate could do OK (though not spectacularly well). The real question is how to get from here to there.
4. I don't have any problem suggesting that Greece needed, and still needs, to collect more tax revenue. Yet many writers on "the left" will bend over backward to avoid uttering these simple words: "The Greek government spent too much money." It's true, the Greek government spent too much money. Be worried if you are reading a writer who does not admit (much less emphasize) that upfront.
5. In addition to greater wealth, here are some reasons why California is not like Greece:
The United States has rich and poor regions, but the 50 states are forced to run balanced budgets, and there is greater mobility within the nation, based on a shared language and culture. Major national policies, like President Obama‘s health care plan, are not judged primarily in terms of which states win and lose; in fact the largely opposed “red states” get a lot of the benefits through higher Medicaid subsidies.
Addendum: Arnold Kling comments.
Sixteen products they sell only at the Chinese Walmarts
1. Crocodiles
2. Bulk rice (TC is this true?)
3. Mixed meat (check out the photo below)
4. Orange juice and cooking oil, wrapped and bundled together
5. Turtles
6. ???? (check out the photo)
7. Walmart brand spirits
8. Rib cages (have I seen those in Mexico Walmart?)
9. Assorted dried reptiles
10. "Beautiful boxes of liquor"
11. Frogs
12. "A Large selection of chopsticks"
13. Ducks (TC: dubious)
14. Great Value Brand Hot and Spicy Beef Granules
15. Pig faces
16. Antibacterial bikini underwear for men (awesome photo)
The link, with photos is here, and I thank Leon Bergen for the pointer.
Assorted links
3. The economics of malware and internet *orn, serious piece, safe for work.
4. Lady Gaga, full of substance.
5. David Gordon reviews the new Elaine Scarry book on torture.
The economic effects of disenfranchisement
Via Chris Blattman, here is a newish paper by Suresh Naidu, on how disenfranchisement translated into inferior economic outcomes for African-Americans:
This paper estimates the political and economic effects of the 19th century disenfranchisement of black citizens in the U.S. South. Using adjacent county-pairs that straddle state boundaries, I rst examine the effect of voting restrictions on political competition. I find that poll taxes and literacy tests each lowered overall electoral turnout by 10-23% and increased the Democratic vote share in national elections by 5%-10%. Second, employing newly collected data on schooling inputs, I show that disenfranchisement reduced the teacher-child and teacher-student ratio in black schools. Finally, I develop a model of suffrage restriction and redistribution in a 2-factor economy with occupational choice to generate sufficient statistics for welfare analysis of the incidence of black disenfranchisement. Consistent with the model, disenfranchised counties experienced a 7% increase in land and farm values per decade, despite a 4% fall in the black population share. The estimated factor market responses suggest that black labor bore a collective loss from disenfranchisement equivalent to at least 13% of annual income, much of which was transferred to landowners.
Here is Naidu's home page. Where did he end up getting a job?
What should World Bank economists do, part II?
My talk there on Thursday outlined and evaluated ten possibilities:
1. Refute the simple (and frequent) fallacies of others in the World Bank.
2. Help the Bank write better contracts — wiser about incentives – for its projects.
3. Study economic growth and Doug North and promote big picture thinking about the big questions that really matter.
4. Abandon big picture thinking — which rarely succeeds – and focus on easy-to-manage public health improvements.
5. Figure out the prevailing net bias in Bank activities and work to offset it. Arguably this bias is that the Bank Board pushes through too many contracts too quickly. Show up to work late. The theory of comparative advantage suggests you focus on what others are lacking.
6. Figure out the prevailing net bias in the economics profession, and work to offset it. Be a generalist.
7. Help the Bank make more money and let the non-economists figure out how to spend it.
8. Take whatever resouces you can, and drop them out of a helicopter onto poor countries. Give up trying to make aid work.
9. Collect and analyze more data.
10. Take a stronger interest in the most effective anti-poverty recipe we have, namely immigration.
Your answers to this question can be found here.
Books in my pile
In various stages of undress:
Sheena Iyengar, The Art of Choosing, reviewed by Virginia Postrel here. Stephen M. Davidson, Still Broken: Understanding the U.S. Health Care System (intelligent book, bad timing since it pushes a non-Obama reform). Peter Heather, Empires and Barbarians The Fall of Rome and the Birth of Europe; good book but I've read too much on this topic lately. What We See: Advancing the Observations of Jane Jacobs, has the pluses and minuses of an edited collection. Boris Groysberg, Chasing Stars: The Myth of Talent and the Portability of Performance; interesting hypothesis but I wanted to see more on regression toward the mean. Stuart Buck, Acting White: The Ironic Legacy of Desegregation, a politically incorrect reexamination of what the title suggests. Matthew E. Kahn, Climatopolis: How Our Cities Will Thrive in a Hotter Future. Nicholas Carr, The Shallows: What the Internet is Doing to Our Brains; is the joke "I couldn't finish it" or "I'm still reading it"? Daniel Rigney, The Matthew Effect: How Advantage Begs Further Advantage, I wonder how much his last book sold.
Assorted links
More Evidence for the Slartibartfarst Principle
Earlier I wrote that due to the Slartibartfarst principle,
…the evidence for intelligent design ought to be readily available in the graffiti of DNA. "Slartibartfast was here," or perhaps "3.14159265," or given what we know of economics, "All rights reserved, MegaCorp. Call for a free estimate."
The fact that, as of yet, we don't see this kind of signature in the data is evidence against intelligent design.
With yesterday's announcement we have a bit more evidence favoring the premise of my argument.
To distinguish their synthetic genome from the naturally occurring version, the researchers encoded a series of watermarks into the sequence. They began by developing a code for writing the English alphabet, as well as punctuation and numbers, into the language of DNA–a decoding key is included in the sequence itself. Then they wrote in their names, a few quotations, and the address for a website people can visit if they successfully crack the code.
Life as advertisement, this is the wave of the future!
Why is Europe so worrisome for the financial markets?
Scott Sumner writes:
Stocks crashed 4% today because people are increasingly worried about the macroeconomy. Yes, there are real aspects to the Greek crisis. Greece will need to engage in austerity over the next few weeks. But Greece, Portugal, and Spain are not big enough countries to knock 25% off the price of oil in one month. Oil prices are plunging for the same reason as US equity prices are plummeting–fear of a sharp fall in AD (and hence economic activity) all over the world.
I don't yet follow Scott's reasoning. If anything, in very recent times the ECB has shown it is willing to abandon independence to monetize various national debts. How much that will boost nominal GDP I am not sure, but I don't take it as negative news for nominal GDP, relative to previous expectations.
I am usually reluctant to play "market psychologist," but I see potentially insolvent banks as a major issue, plus their connection to money market funds. That has an AD link to be sure, but the uncertainty of another major bailout, and its fallout for intermediation, would be paralyzing to financial markets. Most of all, the fear is that "Europe-as-we-knew-it" was a bubble of sorts, and that other people's digestion and comprehension of that possibility will create adjustment problems around the world, including China.
I'm not convinced that the "end of the tunnel" for Europe on this one has to be so dire. (Imagine the 1987 world, with Greece not on the Euro, and extrapolate it, with Greece in default a lot of the time but with most of Europe simply being Europe; is it so bad?) It's the uncertainty about the transition path and what that path means for broader notions of European cooperation. It's like imagining a man committed to driving from here to there, yet with no paved road in between or maybe also no unpaved road. Yet Europe is committed to the journey.
The Executive dining room at the World Bank
The room mixes many different cuisines in the form of a buffet, so you can test directly a theory of buffets, while holding quality of the kitchen constant. The cold part of the buffet is excellent, especially the smoked salmon and the prosciutto with melon, both well above typical U.S. standards. Lamb tends to hold up relatively well in the buffet format. Avoid anything cooked rapidly at high heat, with sealed-in juices. Never take most forms of Chinese food from a buffet. The chicken vindaloo was soggy, though Indian generally does well in the buffet format. I looked for fermented Korean snacks but in vain. The shrimp with cilantro was better than expected, vaguely Peruvian. At no point were they trying to trick me with "filler." Overall you could do worse than to eat here, which implies donor opinion is a constraint on raising WB salaries explicitly.
What are the other principles for eating properly at buffets?
Markets in everything
Hedge funds have found a new market to invest in: whistle-blowers.
Informants who turn in tax cheats have to wait years to get their share of any reward from the I.R.S.’s recently expanded whistle-blower program. So hedge funds, private equity groups and other big investors are offering an alternative. They are essentially agreeing to buy a percentage of those future payouts in exchange for a smaller amount upfront to the whistle-blowers.
The surging size of the potential awards is driving all the interest. Three years ago, the I.R.S. began offering bigger rewards – 15 percent to 30 percent of whatever money the government recovered – in a move that has turbocharged the agency’s whistle-blower program.
The full story is here. And what about the price?
While the market in whistle-blower futures is in its infancy, investors have been requesting as much as 65 percent of any award an informant receives, according to lawyers negotiating possible deals. In the more established field of litigation finance, investors who underwrite the cost of a lawsuit get 5 percent to 50 percent of any legal settlement or jury award.