Four Reasons Financial Intermediaries Fail
28 Jul 2016 Leave a comment
in applied price theory, business cycles, macroeconomics, monetary economics Tags: bank panics, banks runs
Hayek on Milton Friedman and Monetary Policy
25 Jun 2016 Leave a comment
in business cycles, economics, F.A. Hayek, macroeconomics, Milton Friedman, monetarism, monetary economics
Tom Sargent on Macroeconomic Theory and the Crisis
12 Jun 2016 Leave a comment
in business cycles, currency unions, economics, Euro crisis, fiscal policy, global financial crisis (GFC), great recession, macroeconomics, monetary economics Tags: Tom Sargent
General government net financial liabilities as % Portuguese, Italian, Greek, Spanish and Irish GDPs
03 Jun 2016 Leave a comment
in budget deficits, business cycles, economic growth, economic history, Euro crisis, financial economics, fiscal policy, global financial crisis (GFC), macroeconomics Tags: Greece, Ireland, Italy, Portugal, public debt management, sovereign debt crises, sovereign defaults, Spain
I had borrowed a lot of money from scratch after 2007. Greece borrowed a lot of money of its own accord from 2010. Italy always owed a lot of money. Spanish do not know all that much money considering their dire financial circumstances.
Source: OECD Economic Outlook June 2016 Data extracted on 01 Jun 2016 12:57 UTC (GMT) from OECD.Stat
Equilibrium unemployment rate: USA, UK, France, Germany, Canada & Australia, 1985-2017
02 Jun 2016 Leave a comment
in business cycles, economic growth, economic history, global financial crisis (GFC), great recession, labour economics, labour supply, unemployment Tags: British economy, Canada, equilibrium unemployment rate, France, Germany, natural unemployment rate
I do admire the way in which the USA has been able to have a steadily falling equilibrium unemployment rate since 1984 through thick and thin. The Great Recession had no impact on the US equilibrium unemployment rate. Not only has the largest member been able to do this, the OECD host country (red squares) has had a pretty steady natural unemployment rate too all things considered.
Source: OECD Economic Outlook June 2016 Data extracted on 01 Jun 2016 12:40 UTC (GMT) from OECD.Stat
Hayek on Friedman as a Keynesian
28 May 2016 Leave a comment
in business cycles, F.A. Hayek, history of economic thought, macroeconomics, Milton Friedman, monetarism, monetary economics Tags: Keynesian macroeconomics
What 3 skills do public policy analysts need?
27 Apr 2016 Leave a comment
in applied price theory, business cycles, economics of bureaucracy, economics of regulation, fiscal policy, macroeconomics, monetary economics Tags: anti-market bias, antiforeign bias, expressive voting, lags on monetary policy, makework bias, rational rationality, tax incidence, The fatal conceit, The pretense to knowledge
I used to argue that the quality of public policy making would double if public policy analysts remembered the first 6 weeks of microeconomics 101 but on reflection more than that is required.
Could we economists today ever show such self-restraint about our own expert recommendations? https://t.co/2UE12JuIgn—
William Easterly (@bill_easterly) November 24, 2015
I picked up my initial insight out when working as a graduate economist in the Australian Department of Finance. That was a few years ago.
I am now concluded that policy analysts also need to know the basics of the economics of tax incidence. Who pays the tax depends on the elasticities of supply and demand rather than who writes the check to the taxman.
The number of times that I have read media and public policy analysis saying who pays the tax is the writer of the cheque to the taxman is beyond counting.
There is also what to do about unemployment and inflation. Do not just do something, sit there might be good advice on most occasions. As Tim Kehoe and Gonzalo Fernandez de Cordoba explain in the context of first do no harm:
Looking at the historical evidence, Kehoe and Prescott conclude that bad government policies are responsible for causing great depressions.
In particular, they hypothesize that, while different sorts of shocks can lead to ordinary business cycle downturns, overreaction by the government can prolong and deepen the downturn, turning it into a depression.
Interesting critique of the Big Short (moral hazard)
15 Apr 2016 Leave a comment
in applied price theory, business cycles, economics of media and culture, global financial crisis (GFC), law and economics, macroeconomics Tags: moral hazard, The Big Short
Deposit insurance
11 Apr 2016 Leave a comment
in applied price theory, business cycles, economic history, economics, economics of regulation, global financial crisis (GFC), macroeconomics, monetary economics, Public Choice, rentseeking Tags: bank runs, banking crises, banking panics, deposit insurance, Thomas Sargent
Many of the key issues about what modern macroeconomics has to say on global financial crises and deposit insurance are discussed in a 2010 interview with Thomas Sargent
Sargent said that two polar models of bank crises and what government lender-of-last-resort and deposit insurance do to arrest or promote them were used to understand the GFC. They are polar models because:
- in the Diamond-Dybvig and Bryant model of banking runs, deposit insurance and other bailouts are purely a good thing stopping panic-induced bank runs from ever starting; and
- in the Kareken and Wallace model, deposit insurance by governments and the lender-of-last-resort function of a central bank are purely a bad thing because moral hazard encourages risk taking unless there is regulation or there is proper surveillance and accurate risk-based pricing of the deposit insurance.
In the Diamond-Dybvig and Bryant model, if there is government-supplied deposit insurance, people do not initiate bank runs because they trust their deposits to be safe. There is no cost to the government for offering the deposit insurance because there are no bank runs! A major free lunch.
Tom Sargent considers that the Bryant-Diamond-Dybvig model has been very influential, in general, and among policy makers in 2008, in particular.
Governments saw Bryant-Diamond-Dybvig bank runs everywhere. The logic of this model persuaded many governments that if they could arrest the actual or potential runs by convincing creditors that their loans were insured, that could be done at little or no eventual cost to taxpayers.
In 2008, the Australian and New Zealand governments announced emergency bank deposit insurance guarantees. In Bryant-Diamond-Dybvig style bank panics, these guarantees ward off the bank run and thus should cost nothing fiscally because the deposit insurance is not called upon. These guarantees and lender of last resort function were seen as key stabilising measures. These guarantees were called upon in NZ to the tune of $2 billion.
- 1. The Diamond-Dybvig and Bryant model makes you sensitive to runs and optimistic about the ability of deposit insurance to cure them.
- The Kareken and Wallace model’s prediction is that if a government sets up deposit insurance and doesn’t regulate bank portfolios to prevent them from taking too much risk, the government is setting the stage for a financial crisis.
- The Kareken-Wallace model makes you very cautious about lender-of-last-resort facilities and very sensitive to the risk-taking activities of banks.
Kareken and Wallace called for much higher capital reserves for banks and more regulation to avoid future crises. This is not a new idea.
Sam Peltzman in the mid-1960s found that U.S. banks in the 1930s halved their capital ratios after the introduction of federal deposit insurance. FDR was initially opposed to deposit insurance because it would encourage greater risk taking by banks.
Late on Friday afternoon, Stuff posted an op-ed piece calling for the introduction of a (funded) deposit insurance scheme in New Zealand. It was written by Geof Mortlock, a former colleague of mine at the Reserve Bank, who has spent most of his career on banking risk issues, including having been heavily involved in the handling of the failure, and resulting statutory management, of DFC.
As the IMF recently reported, all European countries (advanced or emerging) and all advanced economies have deposit insurance, with the exception of San Marino, Israel and New Zealand. An increasing number of people have been calling for our politicians to rethink New Zealand’s stance in opposition to deposit insurance. I wrote about the issue myself just a couple of months ago, in response to some new material from the Reserve Bank which continues to oppose deposit insurance.
Different people emphasise different arguments in making the case for New Zealand to…
View original post 1,963 more words
Unemployment rates across the OECD in 2015
26 Mar 2016 Leave a comment
in business cycles, economic growth, Euro crisis, global financial crisis (GFC), great recession, job search and matching, labour economics, macroeconomics, unemployment
Tax mix in the USA as a percentage of GDP since 1965
18 Mar 2016 Leave a comment
in business cycles, economic history, fiscal policy, great recession, macroeconomics, politics - USA, public economics Tags: company tax, company tax rate, growth of government, GST, indirect taxation, property taxes, size of government, Social Security contributions, taxation and investment, taxation and labour supply, welfare state
The only major change in the US tax mix in the last 50 years has been greater reliance on social security contributions.
Source: OECD Stat.
The share going to income taxes bobbing up and down quite a lot in the last 30 years much of that to do with the business cycle. In the 1990s, the share of taxes from personal income increased during boom times. In the Great Recession, the tax share to income tax rose with the declining economy as did that on corporate profits.
Utopia, you are standing in it! 
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