Matt Nolan

If we have a bank tax, make it a deposit levy

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I argue the deposit levy point (as a form of insurance) here.

The only point I have to add is that some may say “why charge poor old depositors”.  I’d note here that we need to think about the “incidence of tax” – if it is true that depositors have no market power, then the entire burden of the tax will fall on banks and borrowers.

This is all part of a broader debate on deposit guarantees (here, here) – if we rule them out, we rule out the justification for a levy as well.  I’d add there is a big issue I haven’t touched – what is our ability to limit deposit insurance given concerns about “bank stability”, and what do we do when banks are just too big (think Ireland and Iceland).  My real desire is to see transparent, and credible, ex-ante policy … and to be honest about the trade-offs we are facing and accepting.

Either way, my focused has switched back to methodology issues as I’ve realised I need to intensify work on my NZAE paper this year (posts here and here) … in case they actually decide to accept the abstract I’ve just submitted.  As a result, when I next get a chance to sit down there are two posts I want to write about assumptions, and then I might start blogging some of the background material I’ve already written about for the paper.

However, knowing me I’ll just start ranting about whatever I see in the paper instead 😉

jamesz

Economists vs historians

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Chris Blattman:

Most papers that show “history matters” try to convince us of some general theory of development from their very specific case study. We like our papers to tell us that the world is systematic and the forces of development are deterministic.

Judging by the paucity of papers that say so, however, we don’t like to hear that the world is complex and (sometimes) behaves in ways almost impossible to predict. Historians are more comfortable with the idea of “critical junctures”, and events that spin societies off in one direction or another.

Matt Nolan

Bernanke rules out currency wars

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As we said in the title, Ben Bernanke has ruled out that monetary policy in developed nations is akin to a “currency war”:

The lessons for the present are clear. Today most advanced industrial economies remain, to varying extents, in the grip of slow recoveries from the Great Recession. With inflation generally contained, central banks in these countries are providing accommodative monetary policies to support growth. Do these policies constitute competitive devaluations? To the contrary, because monetary policy is accommodative in the great majority of advanced industrial economies, one would not expect large and persistent changes in the configuration of exchange rates among these countries. The benefits of monetary accommodation in the advanced economies are not created in any significant way by changes in exchange rates; they come instead from the support for domestic aggregate demand in each country or region. Moreover, because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not “beggar-thy-neighbor” but rather are positive-sum, “enrich-thy-neighbor” actions.

I’ve heard this point a few times in the past (here, here, here, here, here, here) … and those are just the links on this blog ;).  You’ll also note that the third one quotes Bernanke … so hearing him say this is hardly surprising.

Matt Nolan

The OBR is not meant to be a replacement for deposit guarantees

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I’ve noticed an interesting interpretation of the Open Bank Resolution going around New Zealand, and the world, where it is seen as a replacement for the lender of last resort function and deposit guarantees.

This has caused outrage among some – even I’ve received some emails and facebook messages from people on it.  But the OBR and implicit/explicit deposit insurance are actually two incredibly different issues.

The OBR is a scheme that helps to ensure that, when a financial institution fails, it is wound down in an orderly fashion – it is like an addition to standard bankruptcy law specifically for financial institutions.  The OBR takes the fact that, if debt has “gone bad” there are a range of creditors, and the loss needs to be attributed between them.  This is great, it makes what is going on transparent, and helps reduce the interruptions associated with the collapse of a large financial institution!

But it doesn’t say anything about the government’s willingness to allow depositors to lose out from a failure.  Any implicit government guarantee that existed still exists.  In Table 1 of the RBNZ’s recent bulletin article on the OBR this is made relatively clear – the idea of inherent insurance is not applicable to the scheme.

Now I think the logic people are taking onboard is as follows:

  1. When it is clear how a bank will be shut down, it is more likely that the government will do so instead of bailing it out.
  2. Therefore, by setting all this up, it is less likely depositors will be bailed out.

While this is true, I think that it inherently misses the point for extremely large financial institutions – such as the big banks in NZ.  Governments have an incentive to bail out depositors, and there may well be a presumed “social preference” for a risk free place to save that doesn’t lose value which is where this is coming from (given that the value of cash depreciates over time).  If we really want the government to be able to commit to not bailing out deposit, and we want society to be comfortable with it, we need to face these issues – which are separate issues from the appropriate focus of the OBR.

Personally, I think the OBR is great – I just think people’s view of its “purpose” has been stretched out of proportion.

Will Taylor

Cutting jobs at DOC and charging tourists more to walk tracks are separate issues

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Duncan Garner has posed the question of whether we should charge tourists more to use DOC trails to save the 100 Kiwi jobs the government is cutting at DOC

Now this conflates two separate issues:

  • If it is efficient to price discriminate and charge tourists more to use DOC tracks, why aren’t we doing it already?
  • Are the jobs necessary to provide the desired level of service from DOC?

Charging tourists more

The first issue implies that the government is leaving money on the table. If it is, then maybe this should be looked at. There may however be valid reasons why the government hasn’t. A basic requirement for price discrimination is that arbitrage isn’t possible. It’s entirely possible that if this pricing structure was implemented people would just get around as locals would find ways to buy tickets (or whatever one does when they book a tramp on a doc track) and pass them onto foreigners at a profit. I don’t know about you but I personally feel a little uncomfortable with the idea of DOC staff checking passports on the trails. It’s also possible that tourists would resent the price discrimination and be put off, which would have the opposite effect.

But, if the reasons to not do it don’t stack up (i.e. it would be profitable), the government should be doing it independent of whether or not it cuts 140 jobs….

Trimming the fat at DOC

The second issue is whether it was efficient for these people to be employed at DOC. I.e. Is DOC “carrying too much fat”/would we be better off with these people serving some other role in the economy? This leads on the next question of analysing whether the social costs of firing them (unemployment/retraining etc..) outweigh any efficiency benefit.

And that is something which I can’t personally answer due to a lack of information. But I would note that if there is an issue of the structure of the hierarchy leading to “too many chiefs”, cutting staff isn’t really going to have much of an impact on service – and it should be taken into account. If this is the factual situation we are in, then the government keeping them employed is a form of welfare, which should be taken into account when analysing the social costs of firing them.

Matt Nolan

We are always repeating old debates

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This is a neat history of deposit insurance in the US (via Economist’s View).  It is a clear indication that many of these debates have occurred in the past, and many of the ideas that float around nowadays are simply old ideas being given fresh life.

In 1829, Forman proposed an insurance fund capitalized by mandatory contributions from the state’s banks. Debate in the State Assembly was heated. Critics said failures could overwhelm the fund; they also argued that its very existence would reduce the “public scrutiny and watchfulness” that restrained bankers from reckless lending. This remains the intellectual argument against insurance today. But Forman’s plan was enacted, and subsequently five other states adopted plans.

All did not go smoothly. In the 1840s, during a national depression, 11 banks in New York State failed and the insurance fund — as prophesied — was threatened with insolvency which in case you face we recommend the Insolvency Ptactitioners Manchester services. The state sold bonds to bail it out.

There has been a bit of discussion of these issues here.  The key thing is that we are working off a clear and concise trade-off, and description of reality, that has existed for a long time now.  Even with this knowledge and this clear framework, trying to figure out what is “right” is difficult, and often policy merely goes to where it is “convenient”.  Our biggest mistake would be to ignore the lessons of history, act like this time is truly different, and try to build our knowledge and understanding from scratch.

This is a broader principle for all debate in the social sciences.  Let’s not forget history, and let’s not forget that thinkers in the past were just as good at exciting thought experiments and “intuitive” forms of argument.