Distinguished academic economist Raghu Rajan took over last week as head of the Reserve Bank of India, the central bank. On his first day, the FT reports, he starting tearing down decades of red tape restricting competition among banks. The template comes from a 2008 report, most of which had been ignored till now. Initial steps include freedom for banks to open new branches (duh!) and easier entry by foreign banks. The rationale is to make banking services available to a broader cross-section of the population, which remains underserved by international standards.
Posts Tagged ‘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.
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.
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.
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? Read the rest of this entry »