Krugman catches up with me on Bitcoins and comes to pretty much the same conclusions in fewer words. Hey, he’s been blogging and writing and talking about economics longer than I have so that’s ok.
I haven’t seen the data myself, but he points to declining value of transacations as people hoard Bitcoins – exactly what is expected and exactly the catastrophic result that makes Bitcoins a really bad idea for a monetary system.
National Treasury is mulling Deposit Insurance with an explicit charge on the banks.
This is not a new idea, and has historically been resisted by the major banks since they feel, generally rightly, that they are less likely to have a problem of confidence and therefore less likely to benefit from deposit insurance. Smaller banks, on the other hand, are certainly more at risk of a run on the bank arising due to perceptions thus causing a liquidity problem when a solvency problem doesn’t exist.
Determining the appropriate mechanism to charge for deposit insurance is not straightforward. Clearly the charge can’t be the same fixed amount for all banks as the exposure will be very different between banks. The large banks would lobby hard to pay a lower rate (even if a higher overall amount) for the insurance given that they should be less subject to those confidence issues.
But how to determine that difference? One could take cue from the market by looking at credit ratings and, even more market-oriented, the spreads on debt issued by the banks. Three immediate problems come to mind:
So there are some fascinating technical problems to solve when implementing deposit insurance, not least of which is deciding how much gets protected.
What caught my eye was Moneyweb columnist, Phakamisa Ndzamela, demonstrating his disbelief at how deposit insurance could create a moral hazard and ultimately increase risk within the banking system.
some senior bank executives have cautioned that this could push the cost of banking higher and somehow encourage risky lending. [emphasis added]
Obviously Ndzamela hasn’t heard of the Savings and Loan crisis in the US in the 1980s, or, I don’t know, the Global Financial Crisis that we are still in, which was massively exacerbated (if perhaps not quite caused) through risk being accepted without due care because it was being passed off immediately to someone else.
In South Africa, interest payments on a mortgage are only tax deductible if the interest cost was incurred in the production of income. If you borrow to finance a property to rent it out, that interest cost can be deducted against rental income. If you live in the property you are financing, you are not generating any income and therefore you don’t get to deduct the interest cost from other, unrelated sources of income.
In the US, the situation has been different. Some have argued that the interest deduction for mortgages in respect of owner-occupied residential property was partly responsible for the property price bubble. It certainly makes buying a house more affordable, but some argue that this creates distortions, imposes a significant cost on the fiscus and overwhelmingly benefits the rich. The larger your mortgage the larger the tax deduction – the antithesis of a progressive tax system.
Casey Mulligan is a generally misguided economist who thinks the US’s current labour problems reflect a decrease in the supply of labour as people choose to rather stay at home and not work and not a massive deficit of demand. With that introduction, you might be skeptical about his post that the mortgage interest deduction is a good idea.
In general, you’d probably be right. There are several reasons it really is a bad idea, but most of all since it is a huge and unnecessary tax break for the rich.
Felix Salmon, who blogs over at Reuters also thinks the article is bunk. Much of what he says is sensible, including demonstrating inaccuracies with Mulligan’s statements around sales taxes on property.
But Salmon says something that really is a little silly: Continue reading
Swaziland vs Greece? More like Swaziland and Greece:
Several years ago, at the height of the thermonuclear phase of the Global Financial Crisis (compared to the slow radiation death we’re experiencing at the moment) a colleague of mine poured scorn on the US as an economy and looked towards the mighty powerhouse of Europe as an example of How To Do Things Right.
So it turns out he was wrong.
Some of the individual underlying economies are in good shape. There is much to be said for Germany’s productivity levels, technology, social safety nets, strong exports, apprenticeship system and more. The house market / debt problems of the south are less obviously good.
The real problem is with the Euro. A single currency in an area more inclusive than theory would suggest as ideal for a common monetary area AND without fiscal union is proving to be very unstable.
I’m not quite ready to make a prediction that the Euro won’t survive, but I’m looking to that as a real possibility. Just take a look at the Germany-Italy spreads to get an idea of how nervous the market is.
This Time is Different is a fascinating look at 8 centuries of financial crises including banking, currency and sovereign default.
It’s chock-full of analysis, numbers, tables and charts showing how as much as things change, the scope for financial crises changes very little. The comparison of Developed and Emerging Markets is particularly interesting in that the differences, while they do exist, are far smaller than stereotypical views. Emerging Markets do tend to have more ongoing sovereign defaults, but the frequency of banking crises is little different. Weirdly, some aspects of Emerging Market crises (such as employment impacts) are less than average for the Developed World.
It isn’t really the book’s fault, but this was one of the few books that I struggled with on my kindle – the graphs and charts and captions to figures were particularly difficult to read. Perhaps they would look better on the Kindle DX (the larger model) or even an iPad or something.
Although the book doesn’t focus on the current (still-happening, if you weren’t paying attention) financial crisis, there are several chapters dedicated to it with an analysis of the economic indicators leading up to the crash. Now it’s incredibly easy to predict an event after it’s happened, but I’m still hopeful that the results can be useful in predicting future problems and potentially impacting economic policies and regulations for the better.
Some key conclusions from the book for predictors of financial crises:
Basel II (and the collection of changes called “Basel II” by some), King III, Solvency II / SAM, IFRS changes, Treating Customers Fairly, FICA, Protection of Personal Information, RE exams and of course RICA all cost a small fortune. Only the last doesn’t affect financial services companies. No wonder the major industry concern is over-regulation.