The downside of fighting corruption

I just heard a novel analysis of India, whose economy seems to be slowing down.  The question is why. The suggested answer: an overly aggressive anti-corruption campaign.

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.

Bureaucracy in NYC

One of the themes of the Global Economy course is that you need balance on regulation:  enough to keep things honest, but not so much that you get in the way of legitimate business. The latter — red tape or bureaucracy — is a good source of stories. Like the Indian restaurant owner who needs approval from three different police stations.  Or who must post a sign asking neighbors if they would like to complain.

Housing stimulus in the UK

The executive summary of the first part of our Global Economy course goes like this:

• Prosperous countries are prosperous because they’re more productive:  they generate more output from the same inputs.
• Productivity comes from institutions:  the thousands of things that make it easier or harder to run a productive business.

The second bullet is a wonderful opportunity to share stories about bad institutions:  corruption, fraud, red tape, etc.

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.

Romer on rules

I ran across a link on Marginal Revolution to a cool piece by my colleague Paul Romer.  He ends with this:

“If we persist with a legalistic rule setting process, the opportunists will thrive. We will settle into a fatalistic acceptance of systemic financial crises, flash crashes, and ever more exotic forms of opportunism.”