Does polishing regulation to raise your World Bank "doing business" score really bring on a recession?; the English vice; UNIX considered easy & intuitive; Yglesias on NIMBYism as the root of most...
Banking on Deposits: "The conventional view holds that by borrowing short and lending long, banks
expose their bottom lines to interest rate risk. We argue that the opposite is true: banks reduce their interest rate risk through maturity transformation." That's a lot of hard work. But Brad, I get this bad feeling that they created somewhat of a strawman, beat it up like a piñata, ate the candy and went home. If banks "expose their bottom lines to risk" then they must do something, sensibly, to "reduce their interest rate risk" as well. How does this run against the conventional view? We all know that. I'm still kind scratching my head. It looks like that the giveaway line is this: "Banks’ maturity mismatch is also a source of concern about financial stability. This has led to calls for narrow banking, the idea being that deposit-issuing institutions should hold only short-term assets." And they probably don't like those calls and the callers.
A prudent bank will engage is some amount of long term investing at fixed rates, but it does expose itself to the risk that rates do not remain in a profitable configuration. We learned from the S&L crisis that financial institutions cannot do very much of _that kind_ of term transformation safely.
As Matt Levine has put it most concisely, the problem is that old banking models were based on a durable and valuable deposit franchise that was rock solid when backed up by a modest amount of deposit insurance. Now that is gone. And regulators' desires not to bailout bank shareholders means banks cannot raise enough capital to cope with their new environment.
Meaning that shareholders cannot induce management to take enough or too little credit and liquidity (but not interest rate mismatch) risk? Are we headed to narrow banking or national Canada style banking?
Wow, great video. I still have my copy of Kernigan and Ritchie, "The C Programming Language!!"
2nd comment, I've found it useful to take the opposite side of any trade that Yglesias writes about. He's more often wrong than right. Subbing to his Substack proved to be a waste of money for me.
Yglesias seems to have a number of hobby horses he likes to ride, so anything on those topics - e.g. US Ten Trillion - can be ignored. He isn't reasoning. He's chatpgt-ing. When not on a hobby horse, he tends to do a relatively shallow analysis which is disappointing in the age of blogs and substacks. Sometimes there's some good stuff in there, often there is not. I went for the free tier, but unsubscribed a few weeks ago.
I generally like his horses but not the way he rides them. And of course, some, like allowing more wealth crating urban development [cost-benefit vetted regulation in general] can't be ridden too often or too hard.
" I don’t fault people in precarious positions trying to get the other person in trouble first, but I do fault the institutions for letting that go on at all…"
No, these complaints should not be made, not just made and then rightly ignored. But, OK, _more_ blame should fall on the institution for allowing the people to get the idea that such complaints would be taken seriously.
"I Continue to Find Þis Unbelievable: And the fact that anyone at all votes for Tories in England equally unbelievable:" ... and anyone who recommends voting for them.
Banking on Deposits: If the deposit franchise were the main source of risk, then some uncomfortable implications follow -- 1) Making banking more competitive -- competing for deposits -- would worsen things for banks and financial stability (counter to Econ principles about a more competitive industry etc.). 2) Insuring all deposits would reduce the risks that banks face (holding inter-bank competition for deposits constant). If (2) is true, then, 3) There is less need or more need for bank regulation? (I'm still scratching my head on this one). 4) There isn't that much of a moral hazard issue, for it is the deposit franchise, not long-term investment, that is a hassle for the banks.
There's definitely an upside to strong anti-trust enforcement. AT&T was a "widows and orphans" stock, one that paid a reliable dividend year after year, the kind you'd put in a trust for the benefit of a widow or orphan. Since they couldn't buy their own stock or anyone else's, they pissed the money off on research. There were no activist shareholders demanding that they get a proper return on their investment rather than fund things like the transistor or new operating systems that would become industry standards for decades.
True. There is this tension in economics: we need to give limited monopoly power (e.g. patents) to spur innovation. But then, unencumbered monopolies can stifle subsequent innovations (by buying start-ups that could be potential future competitors, say, or by buying other people's patents, or lobbying to have drug patents extended etc.) to maintain the monopoly power. This last part most definitely needs what you say. But then, we are also discovering that a lot of these breakthroughs were not market- or competition driven in the conventional sense. Hence, Michael Kremmer's proposals about spurring innovation that Brad posted a few weeks ago. (Governments used that framework for vaccine invention during the COVID pandemic, and we got several in record time). Otherwise, we'll keep getting innovations like 14 characters and never get flying cars.
Plus a Nobel Prize in astrophysics!!! Professor DeLong highlights the importance of the industrial research laboratory in his book, a fact that lots of lesser people ignore.
They probably lend based on their expectation of future interest rates. If they expect that interest rates will fall, they lend at current (higher) fixed rates and lock that return. If they expect that future interest rates will rise, they lend at floating rates so that they're not hurt when interest rates do rise. In either case, their bet can go awry. They can also lend at a mix of fixed and floating rates for different horizons of the same loan if they can find a customer who thinks the opposite of the Bank's interest rate expectations will occur -- a double coincidence of intertemporal wants. (Google "Kiyotaki and Wright" for some lovely, lovely monetary theory papers on this).
Sure. Lending s risky, but with credit risk you can be sort of protected by the law of large numbers and the skill of your credit officers. Interest rate mismatch risk is pure speculation. Don't get me wrong. Speculation is good, but not done too much by highly leveraged firms like banks.
Sorry, I meant "Kiyotaki and Moore." John Moore gave an LSE lecture on this many years ago that explained plainly what they had done in their papers. It was a fun read, and illuminating..
Banking on Deposits: "The conventional view holds that by borrowing short and lending long, banks
expose their bottom lines to interest rate risk. We argue that the opposite is true: banks reduce their interest rate risk through maturity transformation." That's a lot of hard work. But Brad, I get this bad feeling that they created somewhat of a strawman, beat it up like a piñata, ate the candy and went home. If banks "expose their bottom lines to risk" then they must do something, sensibly, to "reduce their interest rate risk" as well. How does this run against the conventional view? We all know that. I'm still kind scratching my head. It looks like that the giveaway line is this: "Banks’ maturity mismatch is also a source of concern about financial stability. This has led to calls for narrow banking, the idea being that deposit-issuing institutions should hold only short-term assets." And they probably don't like those calls and the callers.
A prudent bank will engage is some amount of long term investing at fixed rates, but it does expose itself to the risk that rates do not remain in a profitable configuration. We learned from the S&L crisis that financial institutions cannot do very much of _that kind_ of term transformation safely.
As Matt Levine has put it most concisely, the problem is that old banking models were based on a durable and valuable deposit franchise that was rock solid when backed up by a modest amount of deposit insurance. Now that is gone. And regulators' desires not to bailout bank shareholders means banks cannot raise enough capital to cope with their new environment.
Meaning that shareholders cannot induce management to take enough or too little credit and liquidity (but not interest rate mismatch) risk? Are we headed to narrow banking or national Canada style banking?
Wow, great video. I still have my copy of Kernigan and Ritchie, "The C Programming Language!!"
2nd comment, I've found it useful to take the opposite side of any trade that Yglesias writes about. He's more often wrong than right. Subbing to his Substack proved to be a waste of money for me.
But you get to read _my_ comments :)
Yglesias seems to have a number of hobby horses he likes to ride, so anything on those topics - e.g. US Ten Trillion - can be ignored. He isn't reasoning. He's chatpgt-ing. When not on a hobby horse, he tends to do a relatively shallow analysis which is disappointing in the age of blogs and substacks. Sometimes there's some good stuff in there, often there is not. I went for the free tier, but unsubscribed a few weeks ago.
Now you are tempting me: scrape Matt Yglesias's substack, feed it to pinecone, and use it to write Matt Yglesias columns...
I generally like his horses but not the way he rides them. And of course, some, like allowing more wealth crating urban development [cost-benefit vetted regulation in general] can't be ridden too often or too hard.
Yglesias: But technology can reduce the steepness of the trade-offs. Congestion pricing/smart metering is impossible w/o transponders and gps.
" I don’t fault people in precarious positions trying to get the other person in trouble first, but I do fault the institutions for letting that go on at all…"
No, these complaints should not be made, not just made and then rightly ignored. But, OK, _more_ blame should fall on the institution for allowing the people to get the idea that such complaints would be taken seriously.
"I Continue to Find Þis Unbelievable: And the fact that anyone at all votes for Tories in England equally unbelievable:" ... and anyone who recommends voting for them.
So do you believe this Mongol story? The paper is long and I have much to read ...
Banking on Deposits: If the deposit franchise were the main source of risk, then some uncomfortable implications follow -- 1) Making banking more competitive -- competing for deposits -- would worsen things for banks and financial stability (counter to Econ principles about a more competitive industry etc.). 2) Insuring all deposits would reduce the risks that banks face (holding inter-bank competition for deposits constant). If (2) is true, then, 3) There is less need or more need for bank regulation? (I'm still scratching my head on this one). 4) There isn't that much of a moral hazard issue, for it is the deposit franchise, not long-term investment, that is a hassle for the banks.
AT&T (1982): UNIX: Making Computers Easier To Use: --- a.k.a R&D Model of Growth, Endogenous Technological Change. Thank you, Paul Romer.
There's definitely an upside to strong anti-trust enforcement. AT&T was a "widows and orphans" stock, one that paid a reliable dividend year after year, the kind you'd put in a trust for the benefit of a widow or orphan. Since they couldn't buy their own stock or anyone else's, they pissed the money off on research. There were no activist shareholders demanding that they get a proper return on their investment rather than fund things like the transistor or new operating systems that would become industry standards for decades.
True. There is this tension in economics: we need to give limited monopoly power (e.g. patents) to spur innovation. But then, unencumbered monopolies can stifle subsequent innovations (by buying start-ups that could be potential future competitors, say, or by buying other people's patents, or lobbying to have drug patents extended etc.) to maintain the monopoly power. This last part most definitely needs what you say. But then, we are also discovering that a lot of these breakthroughs were not market- or competition driven in the conventional sense. Hence, Michael Kremmer's proposals about spurring innovation that Brad posted a few weeks ago. (Governments used that framework for vaccine invention during the COVID pandemic, and we got several in record time). Otherwise, we'll keep getting innovations like 14 characters and never get flying cars.
Plus a Nobel Prize in astrophysics!!! Professor DeLong highlights the importance of the industrial research laboratory in his book, a fact that lots of lesser people ignore.
Short-Run Economic Growth &* “Doing Business” Scores: Hmm. First, World Bank a data generating process? Second, Bingo! about the VAR.
Itamar Drechsler: Does it explain why banks lend long at _fixed_ rates?
They probably lend based on their expectation of future interest rates. If they expect that interest rates will fall, they lend at current (higher) fixed rates and lock that return. If they expect that future interest rates will rise, they lend at floating rates so that they're not hurt when interest rates do rise. In either case, their bet can go awry. They can also lend at a mix of fixed and floating rates for different horizons of the same loan if they can find a customer who thinks the opposite of the Bank's interest rate expectations will occur -- a double coincidence of intertemporal wants. (Google "Kiyotaki and Wright" for some lovely, lovely monetary theory papers on this).
Sure. Lending s risky, but with credit risk you can be sort of protected by the law of large numbers and the skill of your credit officers. Interest rate mismatch risk is pure speculation. Don't get me wrong. Speculation is good, but not done too much by highly leveraged firms like banks.
Yep. The problem was that they thought that their hold-to-maturity strategy was an implicit hedge...
But even that does not work if deposit rates change.
Sorry, I meant "Kiyotaki and Moore." John Moore gave an LSE lecture on this many years ago that explained plainly what they had done in their papers. It was a fun read, and illuminating..