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October 23, 2014

Latest Posts from Economist's View

Latest Posts from Economist's View

'Helicopter Money'

Posted: 22 Oct 2014 09:17 AM PDT

Everything you ever wanted to know about helicopter money:

Helicopter money, by Simon Wren-Lewis, Mainly Macro: Periodically articles appear advocating, or discussing, helicopter money. Here is a simple guide to this strange sounding concept. I go in descending order of importance, covering the essential ground in points 1-7, and dealing with more esoteric matters after that. ...

'Persuasion with Statistics'

Posted: 22 Oct 2014 08:32 AM PDT

Chris Dillow:

Persuasion with statistics: Mark Thoma's point that apparently strong econometric results are often the product of specification mining prompts Lars Syll to remind us that eminent economists have long been wary of what econometrics can achieve.
I doubt if many people have ever thought "Crikey, the t stats are high here. That means I must abandon my long-held beliefs about an important matter." More likely, the reaction is to recall Dave Giles' commandments nine and 10. (Apparently?) impressive econometric findings might be good enough to get you published. But there's a big difference between being published and being read, let alone being persuasive.
This poses a question: how, then, do statistics persuade people to change their general beliefs (as distinct from beliefs about single facts)?
Let me take an example of an issue where I've done just this. I used to believe in the efficient market hypothesis. ...[explains why that changed]...

He concludes with:

The above is not a story about statistical significance (pdf). Single studies are rarely persuasive. Instead, the process of persuading people to change their mind requires diversity - a diversity of data sets, and a diversity of theories.  Am I wrong? Feel free to offer counter-examples.

'Will the Big Banks Ever Clean Up Their Act?'

Posted: 22 Oct 2014 08:32 AM PDT

I am not convinced that telling the kids to be good or else -- when there's a history of not doing much to enforce the request -- will work:

Will the big banks ever clean up their act?, by Mark Thoma: Federal Reserve Bank of New York President William Dudley delivered a stern warning to the largest banks in a speech earlier this week. Either clean up your illegal and unethical behavior through "cultural change" from within, he said, or be broken into smaller, more manageable pieces.

In his conclusion, the warning was direct and explicit:

"...if those of you here today as stewards of these large financial institutions do not do your part in pushing forcefully for change across the industry, then bad behavior will undoubtedly persist. If that were to occur, the inevitable conclusion will be reached that your firms are too big and complex to manage effectively. In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively. It is up to you to address this cultural and ethical challenge."

How can the needed change be accomplished? ...

Will this work? Will large financial firms take the threat that they might be broken up seriously? Will they even bother to implement the many suggestions Dudley made?

Regulators have been reluctant to break up big banks in the past out of fear that it might undercut their ability to finance very large projects and hurt their competitiveness in international markets. And given that this behavior is so pervasive and has endured for so long, regulators haven't been as tough as they could be in stopping it.

Maybe this time is different. Maybe financial firms believe regulators are serious, and they will change the culture that has allowed these problems to exist. Perhaps the threat to break up the banks if they continue to prove they are "too big to manage" is real.

Let's hope so, because the financial instability that can occur when large banks behave unethically or when they fail to comply with existing regulations can be very costly for the nation's economy.

But, again, I doubt asking banks to change their culture will be enough, they will need to be persuaded through other, stronger means. (If it was up to me, I would have broken them into smaller pieces long ago. I do not beleive the minimum efficient scale is anywhere near as large as the largest banks, their political and economic power is too strong, and they pose a risk for the economy when they misbehave or make big mistakes. Smaller banks don't solve all these problems, there can still be widespread, cascading bank failures for example, but it does reduce the risks.)

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