Canada’s Great Escape

by Jerry O’Driscoll

There has been an earlier discussion of why Canada didn’t suffer a banking crisis.  The Financial Times asked the same question in its January 30/31 issue. The answers provided by the FT may not satisfy all, but here they are:  Old-fashioned prudential regulation is singled out: capital requirements, quality of capital and leverage ratios. Other major Western countries, particularly the US, were all relaxing them while Canada was tightening them. The regulators worked in tandem and there were no regulatory gaps to exploit.   Additionally, bank regulation in Canada is principles-based, rather than rules-based.  That obviates legalistic circumvention of safety-and-soundness regulations.  “The message in the US is it’s your responsibility to meet our rules.  In Canada, the responsibility is to run the institution right.”   Finally, there were no trendy innovations in the mortgage market, and securitization was much less common.   In other words, banking and supervision done the old-fashioned way: safety first.

Crowding Out DeLong: A Clarification

by Mario Rizzo  

“What it [the total of stimulus-created or saved jobs -- MR] doesn’t consider are the jobs lost due to the very policies that are “saving” jobs. Government can only spend what it takes from the private sector one way or another, either through taxation, borrowing, or the redistribution effects of inflation. For every dollar that government spends, there is one less dollar being spent somewhere else in the economy. The jobs that weren’t created because the private sector lacked access to capital due to increases in government borrowing should be offset against whatever jobs the stimulus supposedly is creating.”  Steve Horwitz.   

Brad DeLong says (in the comments below my previous post) that I got Steve Horwitz’s point about crowding out wrong and therefore my defense of Horwitz is inappropriate. Furthermore, then, I miss the importance of DeLong’s evaluation that Horwitz is incompetent.  

First, and most important, I did not intend my post to be primarily a defense of Horwitz and therefore an implicit criticism of DeLong in his criticism of Horwitz. (Got that, readers?)

I intended to say simply that (1) DeLong is wrong for not worrying about crowding out in its various dimensions; and (2) that someone who worries about crowding out, like Steve Horwitz, is therefore not clueless or worse.

Estonia – The Return of a Baltic Tiger?

by Andreas Hoffmann*

The new member states of the EU were hit hard by the current crisis. Especially the former Baltic tigers (Estonia, Latvia, Lithuania) have seen a tremendous decline in GDP. While our economies face difficulties to cope with a decline of about five percent of the GDP, they lost 10 to 15 percent. In my opinion, Estonia is the most interesting of the three as it chose a distinct way to deal with the crisis.

Crowding Out Brad DeLong

by Mario Rizzo  

Brad DeLong thinks that, under present circumstances, the crowding out of private expenditure by fiscal stimulus is not a live issue. The basic argument is that since neither average wages nor interest rates have risen in response to stimulus, no resources are being diverted from private to public uses. 

I am unsure what the standards of good analysis are among Keynesian macroeconomists, so I proceed with some trepidation. However, as readers of this blog will know, I am unhappy with the level of macro-aggregation usually practiced by both Keynesian and new-classical macroeconomists. So I want to disaggregate the analysis a bit.  

Three Aspects of the Volcker Rule

by Chidem Kurdas

Former Federal Reserve chief Paul Volcker and President Obama want to force banks to get rid of their proprietary trading operations, hedge funds and private equity funds. There is more to this policy initiative that meets the eye at first glance.

Mr. Volcker in effect gives two unrelated rationales. One is that “adding further layers of risk to the inherent risks of essential commercial bank functions doesn’t make sense…” So, banish speculative trading to reduce risk.

Put that way, it sounds reasonable enough. The only problem is that it has no real connection to the crisis of 2008 and would almost certainly have no role in preventing  credit cycles, of which the crisis was a manifestation. This irrelevance is presumably why it was not included in the mammoth financial regulation bill making its way around Congress.

Who Said That?

by Jerry O’Driscoll  

“Economics is not the science that gives accurate near-term forecasts of inflation and output growth.  There is no such science.” 

What economist said that?  Is it the pronouncement of an Austrian, or some other heterodox critic?  

Before answering, I want to make a point.  In the aftermath of the crisis, economists have been realigning and reassessing their positions.  Perhaps the most shocking example (at least to some) is Richard Posner’s breaking with his Chicago colleagues and discovering the brilliance of Keynes and the virtues of regulation (at least in principle).  

Growth Data Are Theoretical Constructs

by Mario Rizzo

The reader of newspapers may be confused about the newly published growth figures for the US economy. We are told that the growth rate for the fourth-quarter of 2009 was 5.7%. But when the inventory effect is taken into account it was only 2.3%. What is going on? 

Greece as a Danger to Euro Stability

by Andreas Hoffmann*

Entering the Eurozone, Greece handed over monetary policy to the European Central Bank and introduced the euro. In a formerly unstable economy, without the danger of depreciation, the risk premium on Greek interest rates shrank to less than half a percent above that of Germany. This brought about convergence of the Greek interest rates. Thus investment and debt could be financed at lower rates. But the advantages from entering the eurozone also have a price.

Beating Bonuses into Risk Controls

by Chidem Kurdas

Deferred vesting of stock options is not a new idea—it gained currency amid the corporate scandals that emerged in the aftermath of the late 1990s stock bubble. It appears to be making more inroads at present, in the aftermath of the twin credit and property bubbles.

This growing practice is not confined to Wall Street, but financial firms are the forefront.  Given that bonuses, and hence stock awards, tend to be by far the largest portion of managers’ pay in the financial industry, the restrictions have the potential for curbing bad behavior in the future.

This may be the one useful result of public anger over outsize compensation and the political grandstanding it has occasioned. It could go some way to reduce the perverse incentive created by the government safety net and cheap federal loans, which are in effect an invitation to put the money to use in lucrative but hazardous ways.

What? No, It Is Not The Onion

by Mario Rizzo

The Wall Street Journal print edition has a headline today: Budget Freeze is Proposed. At first I thought it was going to be about some Republican plan. But the first sentence said: “President Obama intends to propose a three-year freeze in spending …” What?  Did The Onion take over the WSJ? Is it April Fools Day?