Saturday, October 30, 2010

The Empire Strikes Back

by Avinash Persaud ©

The role of financial institutions in the global crisis has led to a consensus that financial regulation must change. This column argues that the banking lobby, far from depleted, has struck back with a vengeance. It has managed to postpone the much needed regulation for a time when the need for it will be forgotten.

There are two remarkable aspects of the consensus around international financial regulation emerging in the run up to the November G20 meeting in Seoul. The first is that there is a consensus. International regulators are agreed that banks must set aside much more capital for risky assets; be less dependent on the whims of money markets; constrain the maturity mismatches between their assets and liabilities and set aside capital for holding complex derivatives where there may be settlement and clearing risks. They also agree that capital adequacy should move counter to the economic cycle and that banks should not be “too big to fail”. Getting an international consensus around action that is sensible – save for the emphasis on “too big to fail”- is no mean achievement.

The second is that despite appearing to be down and out, the banking lobby has struck back, successfully making the case that all of these initiatives should be postponed or phased-in between 2015 and 2019. By then the pressure for regulatory reform could be a distant memory. Financial regulation veterans will be experiencing déjà vu. In each of the last seven international financial crises, plans for a radical shake up of international regulatory or monetary arrangements made surprising progress, only to be tidied away and stuffed in the bottom drawer once the economy recovered. Many of the new initiatives being proposed today have been pulled out of that same drawer, dusted down and updated.

The argument that the banking system is too broken and the world economy too fragile, to support more onerous regulations, is seductive for politicians desperately trying to boost consumer demand. But it is suspect. It highlights that attempts to make banking regulation more counter-cyclical have not gone far enough. The point of counter-cyclicality is to loosen the constraints to lending in times of recession like today and to tighten them when growth and optimism have returned and the worse credit mistakes are being made. Counter-cyclicality needs to be at the heart of the new regulatory regime and not an optional extra. As Professor Charles Goodhart of the LSE and I have said before, crashes will not be avoided if we continue to feed the booms. The methodology of counter-cyclicality is complex and given that economic cycles are more national or regional than global, it makes for greater host country regulation and national ring-fencing of bankers’ operations. International banks do not like that. To counter they appeal to the “right”-sounding notion of level playing fields.

The other problem of kicking regulatory initiatives into the long grass is that as long as the prospect of new profit-squeezing regulation is out there, uncertainty will limit the one thing everyone is agreed the banking system needs more of – capital from investors. It is one of those delicious fallacies of composition that what banks want individually is often not in their collective interests. I recall writing in October 2002, what the FT headline writers presciently captured as “Banks put themselves at risk in Basel.”

Competitive finance is critical to the development of a robust and dynamic economy – locally and globally. But the lesson currently being repeated is that regulatory capture – subtle, sophisticated, and seductive – has the power to stop us from developing a financial industry that serves the economy rather than the other way around.

Tackling regulatory capture head on is the better argument for limiting bank size. The notion that smaller institutions will make the financial system safer ignores history. The UK Secondary Banking Crisis of 1973-75, for example, had a bigger impact on property prices and the stock market than the current one. The principal avenue of financial contagion is the panic-stricken search for institutions that look similar to the one that has just failed. Moreover, a large number of small institutions doing the same dangerous thing is just as toxic, if not more so, than a small number of large institutions engaged in the same activity. But smaller institutions invest less in political lobbying. A politically less powerful financial system has a better chance of being reassuringly boring.

The way to make the financial system safer is to break up institutions not by the porous boundaries of “narrow” and “wholesale” banking, but by the more fundamental boundaries of risk capacity. To create systemic resilience we need a systemic approach to capital adequacy requirements across the entire financial system, one that pushes different financial risks to wherever across the entire financial there is greater capacity for those different risks.

This is simpler than it sounds. There are three major types of risk: credit risk, market risk, and liquidity risk. Their differences can be found by the different ways in which these risks can be hedged or absorbed. The capacity to absorb liquidity risk comes from having time to sell an asset because liabilities, like promises to pay a pension in twenty years, are long-term. The capacity to absorb credit risk comes from having access to a wide range of uncorrelated credit risks to pool together, like a loan to an international oil company and another to a local wind farm. A financial system in which liquidity risks were held by young pension funds because of the capital required to set aside maturity mismatches, and credit risks by large consumer banks, because of the capital required to set aside for concentrated credit risks, would be far safer than one with twice the amount of capital but where the banks fund illiquid private equity investments and pension funds hold credit derivatives because regulators and accountants treated risk as if all that mattered was price volatility not risk capacity. Limiting risk taking to risk capacity would limit the size of banking institutions. It would create opportunities for new players with different risk capacities.

But the odds of a systemic approach to systemic risk appear slim. It’s politics, stupid!

Republished with permission of

Thursday, October 28, 2010

Well Said...

"Philosophy recovers itself when it ceases to be a device for dealing with the problems of philosophers and becomes a method, cultivated by philosophers, for dealing with the problems of men."

~ Prof John Dewey

Prof John Frederick Dewey (1859-1952)

10 Ways A Grammar/Spelling Checker Can Help

by Tomer Harel © 2010 Takanomi Ltd Company

Software that will find corrections for your spelling and grammar has many benefits. Some of these reasons are not so obvious, while others are quite apparent. Although social networking and texting has caused many people to stop using good spelling and grammar, professional people, employers and teachers still expect it. In fact, more emphasis is being placed on this in recent years due to the decline in good writing skills. Here are some of the advantages in using a program that will find and correct grammar and spelling errors.

1. Learning problems such as dyslexia or attention deficit disorder cause people to struggle in both spelling and grammar. A program that can do a grammar and spelling check on written work will help people find the mistakes that they tend to make. Those with learning disabilities sometimes have trouble focusing and/or catching their errors. A software program that will catch these mistakes will make it easier to communicate with others and help them avoid making embarrassing mistakes.

2. Another great advantage of having a grammar and spelling checker is the error-free work that will be produced. With a program helping them find their spelling and grammar errors, people no longer have to be anxious about their work. With a spelling and grammar checker, they can rest assured that their work will be correct.

3. Spelling and grammar really matters on the job. People don't usually spend enough time proofreading their work, which often backfires on them. Oftentimes, they may not know the damage that comes about by using poor grammar and spelling. However, the bottom line is that others will have negative feelings about them and their company if their words are not used correctly. People will be more likely to succeed at their jobs if they use good spelling and grammar skills. This can make it more likely for them to receive promotions and a raise from their employers.

4. Spelling and grammar checkers are especially helpful for those who are very busy. It takes time, but everyone should proofread their work. These programs can help save time by finding errors and making suggestions for correction.

5. Many people hate to write because they know they don't do a good job at communicating or they don't have good writing skills. A top-notch spelling and grammar checker can help to take away some of that stress. They can write papers for school, comment on a social networking site or send an email with the confidence that they are avoiding major mistakes in spelling and grammar.

6. People who don't have good spelling and grammar skills will often find other people to proofread their work for them. While this is helpful, they still must depend on others. Others must now take the time to do this work for them and they have to wait on others, trusting that they will do a good job. If they can find a checker program to do this for them, they will be able to become more independent and get their work done when they want to get it done.

7. Although many don't like to admit it, having good grammar and spelling skills is important. People often look down on those who don't write correctly, even belittling them. If an employee continues to make grammatical and spelling errors at work, their employee has the right to fire them, as this is a reflection on the image of the company. Using a quality spelling and grammar correction program will not only help workers to have more confidence in themselves, but they will gain the confidence of their customers, peers, teachers and employers as well.

8. Because so many people take good writing skills lightly, people can really gain the upper hand at school, on the job and elsewhere by using correct words, both in spelling and grammar. Teachers are very impressed with students who take the time to correct their errors and turn in papers with great grammar and spelling. A worker who will take the time to correct written errors is appreciated by his or her employee. It's a great feeling to know that more doors are open to a brighter career future by investing in a grammar and spelling checker.

9. Investing in a grammar and spelling checker will enable others to communicate effectively on social networking sites, emails, and letters. This can affect their personal lives because the greater their skill with words, the greater their ability to communicate with others. Friends and colleagues will be impressed at the ability of those who can write with meaning and depth.

10. For those just learning to speak English, a spelling and grammar checker is a great way to improve their skills while communicating with others. As they learn, they will be able to use their spelling and grammar program to find and suggest the right words. This can help them learn also, both in grammar and spelling. They will then be able to write things correctly, through the spelling and grammar correction that follows, and thus, improve their skills and communicate with others in English.

Republished with permission of

Sunday, October 24, 2010

Well Said...

"Maybe the preoccupation with technological progress has overshadowed our concern with human progress."

~ Wynton Marsalis

"Dr" Wynton Marsalis

Monday, October 18, 2010

How Wall Street Consumes Main Street

Here's a short video from the Huffington Post that discusses how banks on Wall Street are essentially "gutting" value from homeowners on Main Street. It would seem to me that Wall Street might find better ways to make money other than consuming the equity of struggling homeowners across the US.

Saturday, October 16, 2010

Financial Economics Intelligence

I am constantly posting and reposting the links below for my students (and sometimes colleagues) who are seeking source data for basic research in financial economics. Here are several of the most important intelligence resources used by economists around the world:

Federal Reserve System Online

Bureau of Labor Statistics

Bureau of Economic Analysis

Internal Revenue Service

If you are conducting basic research in financial economics, you will find an enormous amount of information and data in the links above. Moreover, most of the material available on these websites is free to access and download…

Friday, October 08, 2010

US Employment to Population Ratio in 10-Year Decline

The latest employment data just released by the Bureau of Labor Statistics (BLS) shows that the US employment to population ratio suffered another decline in September 2010 to 58.6%, down from 58.9% for the same period last year, and from 58.8% for the previous month in August. The US employment to population ratio has been trending downwards since 2000.

Many economists believe that reporting the number employed as a percentage of the civilian population provides a more accurate description of the current state of employment than conjecturing the number of "unemployed" in a population. The US employment to population ratio reached a historical peak of 64.4% on an annual basis in 2000.

Source: Bureau of Labor Statistics

Thursday, October 07, 2010

The History of Economic Thought

Here is a link to a useful website for those interested in financial economics, entitled The History of Economic Thought. The website is provides a comprehensive overview of the major schools of economic thought, including the pre-classical, classical, Ango-American, continental, heterodox, Keynesian, and thematic approaches to economics:

The website is sponsored and maintained by The New School in NYC.

Wednesday, October 06, 2010

Public Dental Clinics: The 1930's is Today

The Main Street Depression that continues to ravage America invites comparisons between today's economy, and that during the Great Depression of the 1930's. Consider the photographs that follow. The first depicts a public dental clinic that treated school children by the busload in Rochester, NY during the Great Depression. The second is a photograph of a typical public dental clinic operating in America today.

Public Dental Clinic in America during the 1930's...

Public Dental Clinic in America Today...

Of course, the quality of dental care has improved dramatically since the 1930's. However, the delivery of clinical dental care to those in need seems to have changed little, or so it appears...