Money. Doing it Right this Time.

onejayhawk said:

Just backwards. Regulations forced the banks to abandon the system designed to protect their investors. During the 19th century, bank failures were a plague. Depositors lost their savings. Regulations were passed to insure there reserves of assets. At the end of the 1920, banks failed because of a liquidity shortage. See It's a Wonderful Life, where the assets are in home loans. This brought about deposit insurance.

From that point, regulations moved toward making money available to underpriviledged people. It was called the Community Reinvestment Act of 1977. Carter called it affirmative action for finance.
http://en.wikipedia.org/wiki/Community_Reinvestment_Act
Enforcement was greatly stepped up during the Clinton administration. As much as the mess can be blamed on one person, that person would be William Jefferson Clinton. The Bush administration did little to slow things down, so they are not innocent, but they at least were facing the right direction. Carter started the ball rolling and Clinton gave it its big push, all in the name of helping the little guy.

The mortgage crisis was caused by regulations. The regulations were designed to encourage something quite different. As I said, unintended consequences.

J

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peter grimes said:

Have any of you read any Piketty? I had never heard of him until the interview with Paul Krugman:
https://www.commondreams.org/headline/2014/04/18-8

"I have proved that under the present circumstances capitalism simply cannot work."

Bold words, but apparently his book is loaded with good research. He also says that inequality in the US is higher than any nation in history. I find that hard to believe.

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MATTHEW YGLESIAS had an excellent piece at Vox on Monday pointing out a fundamental shift that has taken place over the past few years in our understanding of the economics of inequality. He begins by considering an "everything-you-need-to-know-about-economics" graduation speech by Thomas Sargent, a Nobel prize-winning economist, which included the line, "there are tradeoffs between equality and efficiency". But Mr Yglesias notes that this statement is no longer a truism. We used to believe that trying to make an economy more egalitarian, while perhaps ethically pleasing, would lead to slower growth. But in the aftermath of Thomas Piketty's new book "Capital in the 21st Century", recent papers by economists at the IMF and a flood of research into the economic effects of inequality, it seems this assumption is either unsubstantiated or just plain wrong. As Mr Yglesias puts it,

There really are tradeoffs between equality and efficiency. But there is no sound basis for believing in a tradeoff between an equitable distribution of income and the creation of a society that is efficient in generating the material basis of prosperity. If anything it is the opposite. The present highly inegalitarian distribution of economic resources is highly inefficient and makes it inordinately difficult to solve serious problems.

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I'm not going to rehash Mr Yglesias's exposition of the research on this topic; you should just read his post. You may also want to take a look at an IMF paper he cites, an exhaustive review of data on the growth effects of inequality and redistribution by Jonathan Ostry, Andrew Berg and Charalambos Tsangarides. Their overall conclusion is that greater inequality in society strongly ******s economic growth, while redistribution is "largely benign", with only very extreme redistribution programmes having some negative effect. Since greater equality is so beneficial, the net effect of redistribution on growth tends to be positive. But rather than get any deeper into the economic argument, I want to talk about the political implications.

The assumption of a trade-off between egalitarian distribution of resources and economic growth has been one of the dominant paradigms of American political thought since the cold war. The moral justification for capitalism employed in the contest against Soviet Marxism was that while the socialist state economy might create greater equality and provide basic necessities for all, competitive capitalist economies would generate so much more growth that the added resources would end up providing even the poor with a higher standard of living than they would enjoy under socialism (through limited government redistribution, if necessary). One can see these assumptions in operation, for example, in George Kennan's startlingly prescient 1946 telegramme describing Soviet aims and intentions, where he notes that the Soviet Union is bent most of all on destroying European moderate socialists, and points to the "success of [the moderate socialists'] efforts to improve conditions for [the] working population whenever, as in Scandinavia, they have been given [a] chance to show what they could do." From the very inception of the cold war, at least among believers in the power of free markets, the vision was that social-welfare programmes in the liberal democracies would ameliorate the hardship of the working class and forestall political unrest while capitalism drove growth forward.

The idea of that equality-efficiency tradeoff is also central to the most important liberal vision of political ethics in the postwar period, John Rawls's 1971 "Theory of Justice". In Rawls's framework, social rules are justified when they are chosen from behind a "veil of ignorance"; when people don't know what role in the resulting social order they will be assigned to. In such a framework, Rawls argued, unequal distribution of resources is defensible only if it is beneficial to even the worst-off individual in society. This idea, which came to be known as the "difference principle", was endlessly hashed over in thousands of undergraduate debates over trickle-down economics and the viability of kibbutzes, but it really took hold through the 1970s and '80s as it became clear that even the poorest residents of the liberal capitalist democracies had come to enjoy a higher standard of living than most citizens of the Soviet bloc.

The difference principle was in part Rawls's response to the ethical difficulties of modelling economic choices. It could be possible in theory for economic choices to increase average utility while severely harming the least fortunate; that would clearly be ethically perverse, and Rawls thought that the difference principle would avoid the problem. But the thing about the difference principle is that it assumes a tradeoff between economic growth and egalitarian distribution of resources. Without such a tradeoff, the thesis is simply uninteresting; if a more unequal society fails even to deliver more overall growth, there is no dilemma to be solved.

What Mr Piketty and his fellow equality-modellers are saying is that, with Soviet-style state socialism having departed the scene, the supposed tradeoff between growth and egalitarian distribution may no longer describe anything important about the world. We can see the rhetoric living on, in debates over Obamacare, long-term unemployment insurance, the minimum wage and so forth, but it's not clear that it means anything. Greater equality seems to be simply good for growth. Once the effects of that shift in economic thinking filter into political discourse, we'll know the cold war is finally dead.

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The French economist Thomas Piketty (Paris School of Economics) discussed his new book, Capital in the Twenty-First Century at the Graduate Center. In this landmark work, Piketty argues that the main driver of inequality—the tendency of returns on capital to exceed the rate of economic growth—threatens to generate extreme inequalities that stir discontent and undermine democratic values. He calls for political action and policy intervention. Joseph Stiglitz (Columbia University), Paul Krugman (Princeton University), and Steven Durlauf (University of Wisconsin--Madison) participated in a panel moderated by LIS Senior Scholar Branko Milanovic. The event was introduced by LIS Director Janet Gornick, professor of political science and sociology at the Graduate Center.

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Takhisis said:

Do stocks, bonds, and other financial investments count as 'earned income'?

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Whomp said:

No. Earned income is paid work. Income from those other sources are investment income and realized capital gains.

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• Innomatu was on fire.
• Monsterzuma should have been the wake up call for the rest of us who weren't understanding Inno at the time.
• Say1988 was almost on point and I will be paying attention to more of say's posts from here on.
• My old posts in this thread were frequently terrible.
• Cutlass was challenged to start a bank. I support this.

OK, a genuinely interesting debate on financial reform is taking place. I’m not even sure where I stand. But it’s certainly worth talking about.

Atif Mian and Amir Sufi draw our attention to proposals to either mandate or create strong incentives for 100-percent reserve banking, coming from Martin Wolf and, more surprisingly, John Cochrane. Equally surprising — at least to me — is that Cochrane seems more aware of the difficulties of the issue.

The basic idea both writers share is that banks as we know them — institutions that issue promises to pay money on, or almost on, demand, while holding liquid assets that cover only a fraction of that potential demand — are inherently subject to runs, self-fulfilling losses of confidence. So they propose that we aim to eliminate such institutions; there would still be things we call banks, but they would simply be custodians of government-issued liquid assets.

Wolf, unless I’m reading him wrong, seems to identify the whole issue with one particular form of short-term debt — bank deposits. This seems an oddly narrow view given the nature of the 2008 crisis, which involved very few runs on deposits but a massive run on shadow banking, especially repo — overnight lending that in a fundamental sense fulfilled the functions of deposit banking but also created the same kind of risks. Cochrane gets this, and calls for a “Pigouvian tax” — i.e., the kind of tax economics textbooks tell us we should have on pollution — imposed on any form of “run-prone short-term debt”.

So, three thoughts.

First, Wolf’s omission is a big one. If we impose 100% reserve requirements on depository institutions, but stop there, we’ll just drive even more finance into shadow banking, and make the system even riskier.

Second, Cochrane’s proposal calls for a remarkable amount of government intervention in finance; it makes liberal proposals for a transactions tax look like minor nuisances. Cochrane insists that we can easily run our economy without dangerous short-term private debt — that we can easily set things up so that the manager of your index fund sells a tiny piece of your stock portfolio every time you use a debit card at 7-11. Is this right?

Third, and on a quite different note: Are we really sure that banking problems are the whole story about what went wrong? I’ve made this point before, but look at any measure of financial stress: what you see is a huge peak in 2008 that quickly went down:



Yet the quick return to normality in financial markets (achieved, to be sure, through bailouts and guarantees) did not produce a quick recovery in the real economy; on the contrary, we’re still depressed and many advanced countries are now on the edge of deflation, more than five years later. This strongly suggests that while bank runs may have brought things to a head, the problems ran deeper; in particular, I’m strongly of the view (based in part on Mian and Sufi’s work) that broader issues of excess leverage, and the resulting balance-sheet problems of many households, are key. And neither 100% reserves nor a repo tax would have addressed that kind of leverage.

One small footnote: Cochrane argues in passing that if you really believed in Keynesian remedies, you shouldn’t care about the soundness of banks, because you can always offset the effects of a banking crisis with stimulus. There are multiple reasons why that isn’t right — among other things, people like me may argue that the dangers of government debt are exaggerated, but we’d still rather not have to engage in large-scale deficit spending on a regular basis. But the main point, surely, is that what stimulus could do and what it will do aren’t at all the same thing. What we’ve discovered over the past five years is that even under conditions that make an overwhelming case for government policies to boost demand, half the economics profession and a majority of policy makers will find reasons to do exactly the wrong thing. This argues for precautionary policies to avoid getting into such situations if possible.

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