Shrink the banks?

Another one from the IGM Forum:

The US government should make further efforts to shrink the size of the country’s largest banks — such as by capping the size of their liabilities or penalizing large banks more heavily through taxes or other means — because the existing regulations do not require the biggest banks to internalize enough of the “too-big-to-fail” risks that they pose.

Does that sound right to you — or not?  The statement gets reasonably strong support from their panel of economists: 54% either agree or strongly agree; 35% are uncertain, have no opinion, or didn’t respond; and only 10% disagree.

What’s wrong with Italy?

Italy is one of the problem countries of Europe, but it’s different from the others.  Unlike Greece, the government deficit is small.  If we exclude interest payments there’s a surplus.  Unlike Ireland and Spain, the banks are fine.  So what’s the problem?

Unintended consequences

Economics is about systems, and it’s not uncommon to see well-intentioned interventions in economic systems produce unintended consequences.  I ran across a good example a few weeks ago.  A well-meaning high school decided to increase the nutritional content of its lunches.  Good idea, right?  The students, though, had a different idea.  They walked down the street and bought as much unhealthy food as they wanted.

Form vs substance in US financial regulation

A post by Kim Schoenholtz

Lawyers are accustomed to distinguishing entities by their legal form — this is a bank, that’s an insurer, over there is an investment fund.  Economists are used to distinguishing by function:  these are all financial intermediaries.  If we have to regulate economic activity, it pays to regulate by function, rather than form. Otherwise, entities simply change their form and avoid the regulation.

In practice, lawyers usually write and enforce regulation, not economists.  The Dodd-Frank reform act is no exception.  Its aims are lofty.  Limit systemic risk.  End too big to fail.  Prevent financial crises.  Protect taxpayers.  Where Dodd-Frank falls short of these lofty goals, often it’s due to the form vs. function problem.  As a result, some intermediaries can still shop for their preferred regulator and bypass Dodd-Frank rules limiting systemic risk.  For more on this, see my Bloomberg op-ed with Tom Cooley.

FAA and financial regulation revisited

A post by Larry White

Paul Romer’s post about the differences between the FAA and financial regulators got me thinking.  Are the latter so bogged down in detail that they miss the point?  Do they lack bottom-line responsibility?

Airlines and banks over the business cycle

One of the central areas where macro and microeconomics intersect is price behavior over the business cycle, especially in industries with market power. Are prices pro-cyclical (higher during booms) or counter-cyclical?