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August 19, 2009

Economist's View - 4 new articles

Rogoff: We Need to Regulate Banks

Kenneth Rogoff warns us not to believe those who argue that the crisis was largely due to government failure, and hence that regulating the financial sector is counterproductive and unnecessary:

Why we need to regulate the banks sooner, not later, by Kenneth Rogoff, Commentary, Financial Times: When in doubt, bail it out," is the policy mantra ... after the ... collapse of Lehman Brothers. With the global economy tentatively emerging from recession, and investors salivating over the remaining banks' apparent return to significant profitability, some are beginning to ask: "Did we really need to suffer so much?"
Too many policymakers, investors and economists have concluded that US authorities could have engineered a smooth exit from the bubble economy if only Lehman had been bailed out. Too many now believe that any move towards greater financial regulation should be sharply circumscribed since it was the government that dropped the ball. Stifling financial innovation will only slow growth, with little benefit in terms of stemming future crises...
Certainly the US and global economy were already severely stressed at the time of Lehman's fall, but better tactical operations by the Federal Reserve and Treasury, especially in backstopping Lehman's derivative book, might have stemmed the panic. Indeed, with hindsight it is easy to say the authorities should have acted months earlier to force banks to raise more equity capital. The March 2008 collapse of the fifth largest investment bank, Bear Stearns, should have been an indication that urgent action was needed. Fed and Treasury officials argue that before Lehman, stronger measures were politically impossible. There had to be blood on the street to convince Congress. ... [C]ommon sense dictates the need for stricter controls on short-term borrowing by systemically important institutions, as well as regularly monitored limits on oversized risk positions, taking into account that markets can be highly correlated in a downturn. ... There should also be more international co-ordination of financial supervision, to prevent countries using soft regulation to bid for business and to insulate regulators from political pressures.
...The view that everything would be fine if Hank Paulson, then US Treasury secretary, had simply underwritten a $50bn bail-out of Lehman is dangerously misguided. The financial system still needs fundamental reform...

I think that even if Lehman had been bailed out the economy would still have been bad, just not as bad, so either way there are substantial economic costs and a case for regulation.

Unidentified Pretend Economist

If you are going to criticize people for their economics and professional standards, shouldn't you try to live up to your own expectations? Richard Posner says:

I am concerned with the fact that academic economists, when they become either public officials or public intellectuals (like Paul Krugman), leave behind their academic scruples.
This raises the question of the ethical responsibility of academic economists, such as Romer (and Krugman, and Lawrence Summers, and many others), who write for the media or join the government, either to adhere to academic standards in their nonacademic work or to make clear to the public that they are on holiday from those standards...

I disagree with his claims, and I think one of his assertions about Romer is wrong (that her current position on the stimulus package differs from what is in her academic work), but in any case, where are his standards? In his discussion of macroeconomic policy, he doesn't even get the basics right (to name just one obvious example, his definition of investment in Y=C+I+G includes financial assets, something principles of macro courses make abundantly clear shouldn't be done, and he talks about foreign demand for US goods, but doesn't include NX in his definition of output). Yet, nowhere does he say "I don't know what I am talking about because I am a judge, not a macroeconomist." Instead, in his role as a public intellectual, he acts like he is an expert in the field. Ethics indeed.

Update: Brad DeLong has much more.

Notes on Co-Ops

Some very rough notes on co-ops I jotted down just before a radio interview yesterday. The main questions I was interested in addressing were the feasibility of co-ops, whether they would lower costs, and whether co-ops would broaden coverage so that it is practically universal. This was a last minute effort, and likely incomplete, so please don't hesitate to add to the list in comments:

1. Co-ops are not very well defined.

2. It is not clear that Co-ops will lower costs. For one, you need at least 500,000 members to have enough bargaining power to matter, and even then it just puts you on an even keel with existing companies. That isn't enough bargaining power to lower costs. Also, will co-ops lower administrative costs? Probably not much.

3. Some reports say the plan would come with 6 billion in start-up funds. But there are still large barriers to entry.

4. This was an eye opener. Blue Cross-Blue Shield, which already has substantial market share in some areas (e.g. 90%), is a non-profit and would likely qualify as a co-op. Though they would likely come under some new regulations in terms of who they must cover if they did change to a co-op, as well as other restrictions, it doesn't seem like this would bring about much change.

5. Some states already allow co-ops, e.g. Iowa, and they have not generally been successful.

6. On coverage, how will that work? Will these co-ops be like Savings and Loans (to which they are often compared) where membership is restricted to certain groups, or will they be forced to provide insurance to anyone who wants it? If so, how do you stop firms from subtly using non-price mechanisms to discourage high cost patients from joining? Exactly how coverage will be regulated is vague in the reports I read, though perhaps there's an actual proposal somewhere that is more informative.

7. Republicans won't support this either, so why are we bothering with it?

[Update: Tyler Cowen asks What are health care co-ops?]

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