When Financial Sectors Become “Too Large”

At the end of July Alan Greenspan published an Op Ed arguing that tighter financial regulation and capital standards will lead to the accumulation of “idle resources that are not otherwise engaged in the production of goods and services” and are instead devoted “to fending off once-in-50 or 100-year crises” resulting in an “excess of buffers at the expense of our standards of living.”...

....While former Chairman Greenspan implicitly assumed that stricter regulation will have a negative effect on financial intermediation and depress future GDP growth, our results suggest that there are many countries for which tighter credit standards could actually increase growth.

The rest on EconoMonitor
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Too much finance?

This paper examines whether there is a threshold above which financial development no longer has a positive effect on economic growth. We develop a simple model in which the expectation of a bailout may lead to a financial sector which is too large with respect to the social optimum. We then use different empirical approaches to show that there can indeed be “too much” finance. In particular, our results suggest that finance starts having a negative effect on output growth when credit to the private sector reaches 110 percent of GDP. We conclude by showing that the size of the financial sector was a significant amplifying factor in the global crisis that followed the collapse of Lehman Brothers in September 2008.

The vox.eu article about it is here

The paper is here

An older version of the paper is  here

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Interview with the BBC on the costs of default

here (my part starts at minute 8)

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What will happen if Greece defaults? Insights from theory and reality

My piece (with Eduardo Borensztein) on the costs of default: here

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Intervista sulla crisi greca alla radio della svizzera italiana

qui oppure qui


http://reteuno.rsi.ch/modem/welcome.cfm?IDc=40891



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Bankers' conflicts of interest in the interwar years: Lessons for today’s regulators

My (joint with Marc Flandreau and Norbert Gaillard) new piece on VOX

The global crisis is frequently compared to the Great Depression and the interwar debt crises. This column argues that, contrary to prevailing opinion, the interwar debt crisis had little to do with bankers’ conflicts of interest – intermediaries were in fact careful in selecting and placing sovereign bonds. Then, as now, public opinion may not be the best guide to policy The rest is here

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Excellent Hamilton post

On stock prices (also read the November 2008 and Spring 2009 posts)

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The Lebanese Madoff

Here: From cousin Amal

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Krugman interview

Here

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From today's FT

Sado-monetarists and reasonable people

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Of Financial Innovations and Excesses

From the Journal of Finance, July 1985: 

In the case of the corporation, a manager does not want to miss out on a perceived good thing if everyone else is doing it....executives are attracted to a new repackaging of mortgaged-backed securities, even though they could manufacture essentially the same thing themselves at a lower cost. Like ants attracted to the honey pot, this is a bonanza for financial promoters. Each time a defeasance plan, leveraged buyout, or new type of mortgage-backed security is sold, substantial promoter fees are realized. But do they make money the old fashioned way by earning it? I think not in many cases.

James C. Van Horne, President of the American Finance Association (1984)

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Stress tests

Baseline scenario explains

My work on public banks: here and here

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Interpreting GDP Growth

From Baseline Scenario. Another post, which I would rename French Sociology and the Education of Tim Geithner is also intersting and shold be read with the, by now classic, Atlantic piece on financila oligarcs.

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Financial innovation for dummies

From BLS

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4 trillion!

Toxic debt may reach $4 trillion. This is about $650 for each inhabitant of the planet, or about 10% of the income per capita of the planet (which is about $7,000). The income per capita of India is about $700 and that of China $1,700. 

The TOTAL income of China and India is about $3 trillion, if you add up the total income of Spain (about $1 trillion) you get to $4 trillion. (income data are 2005 GNI from the World Bank WDI). 

How much would Dr Evil ask?

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Change at the BWI

Here is Simon:

The managing director of the I.M.F. ... has always been a European... this is code for saying they will pick someone from an emerging-market country, such as India or Brazil...

To make matters more interesting, the I.M.F.’s managing director is expected by insiders to resign within a year, to resume his (promising) pursuit of the French presidency. 

How did the Obama administration pull this off....by volunteering to open up the selection process for the World Bank...which has always been run by an American. The next president of the World Bank is very likely to be Chinese.

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Nouriel's song

Here

But the song doesn't say that he is also a master rollerblader!

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Daron Acemoglu on the crisis

In our obliviousness to the importance of market-supporting institutions we were in sync with policymakers. They were lured by ideological notions derived from Ayn Rand novels rather than economic theory. And we let their policies and rhetoric set the agenda for our thinking about the world and worse, perhaps, even for our policy advice. In hindsight, we should not be surprised that unregulated profit-seeking individuals have taken risks from which they benefit and others lose. The rest if here
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Madoff and the regulators

He was very close to them (his daughter married one), this is probably why nobody listened to this guy. (the story is here) Thanks to KV via MH.

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The best coverage of the crisis in East Europe

is from Edward Hugh at at Fistful of Euros.
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