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The U.S. federal budget deficit for 2018 came in just shy of $800 billion, or about 4% of the gross domestic product (the primary deficit, which excludes the interest expense of the debt, was about 3% of GDP).


As the figure above shows, the present level of deficit spending (as a ratio of GDP) is not too far off from where has been in the 1970s and 1980s. It's also not too far off from where it was in the early 2000s (although, the peaks back then were associated with recessions).

Of course, the question people are asking is whether deficits of this magnitude can be sustained into the foreseeable future without economic consequences (like higher inflation). In this post, I suggest that the answer to this question is yes, but just barely. If I am correct, then any new government expenditure program will have to come at the expense of some other program, or be funded through higher taxes. Let me explain my reasoning.

The Arithmetic of Government Spending and Finance

I begin with some basic arithmetic (I describe here where theory comes in). Let G denote government expenditures and let T denote government tax revenue. Then the primary deficit is defined as S = G - T  ( if S  <  0, then we have a primary surplus ). The absolute magnitudes involved have little meaning--it turns out to be more useful to measure a growing deficit relative to the size of a growing economy. Let Y denote the gross domestic product (the total income generated in the economy). The deficit-to-GDP ratio is then given by (S/Y).  In what follows, I will assume that this ratio is expected to remain constant over the indefinite future (this is what a "sustainable" budget deficit means.)

Let D denote the outstanding stock of government "debt." For countries that issue debt representing claims to their own currency and permit their currency to float in foreign exchange markets, attaching the label "debt" to these objects--like U.S. Treasury securities--is somewhat misleading. The better analog in this case is equity. Companies that finance acquisitions or expenditure through equity do not have to worry about bankruptcy. They may have to worry about diluting the value of existing shareholders if they over-issue equity, or use it to finance negative NPV projects. The same is true of the U.S. federal government (but not state or local governments). The risk of over-issuing treasury debt is not default--it is share dilution (i.e., inflation).

Let R denote the gross yield on debt (so that R - 1 is the net interest rate). If we interpret D as currency, then R = 1 (currency has a zero net yield). If we interpret D as U.S. Treasury debt, then R = 1.025 (UST debt has an average net yield of around 2.5%). Note that in some jurisdictions today, government debt has a negative yield (so, R < 1 ) -- that is, government "debt" is in this case an income-generating asset!

Alright, back to the arithmetic. Let D' denote the stock of debt inherited from the previous period that is due interest today. The interest expense of this debt is given by (R - 1)D' (the interest expense of currency is zero). The primary deficit plus interest expense must be financed with new debt D - D', where D represents the stock of debt today and D' represents the stock of debt yesterday. Our simple arithmetic tells us that the following must be true:

[1]  S + (R - 1)D' = D - D'

Let me rewrite [1] as:

[2] S = D - RD'

Now, let's divide through by Y in [2] to get:

[3] (S/Y)  = (D/Y) - R(D'/Y)

We're almost there. Notice that (D'/Y) = (D'/Y')(Y'/Y). [I want to say that this is just high school math...except that my son came to me the other night with a homework question I could not answer. If you're not good at math, I understand your pain. But if you need some help, don't be afraid to ask someone. Like my son, for example.]

Define n = (Y/Y'), the (gross) rate at which the nominal GDP grows over time. In my calculations below, I'm going to assume n = 1.05, that is 5% growth. Implicitly, I'm assuming 2-3% real growth and 2-3% inflation, but I don't think what I have to say below depends on what is driving NGDP growth. In any case, let's combine (D'/Y) = (D'/Y')(Y'/Y) and n = (Y/Y') with [3] to form:

[4] (S/Y)  = (D/Y) - (R/n)(D'/Y')

One last step: assume that the debt-to-GDP ratio remains constant over time; i.e., (D'/Y') = (D/Y). Again, I impose this condition to characterize what is "sustainable." Combining this stationarity condition with [4] yields:

[*] (S/Y)  = [1 - R/n ](D/Y)

Condition [*] says that the deficit-to-GDP ratio is proportional to the the debt-to-GDP ratio, with the factor of proportionality given by [1 - R/n ]. This latter object is positive if R < n and negative if R > n.

The Mainstream View

There is no such thing as "the" mainstream view, of course. But I think it's fair to say that in thinking about the sustainability of government budget deficits, many economists implicitly assume that R > n. In this case, condition [*] says that if the outstanding stock of government debt is positive (D > 0), then sustainable deficits are impossible. Indeed, what is needed is a sustainable primary budget surplus to service the interest expense of the debt.

The condition R > n is a perfectly reasonable assumption for any entity that does not control or influence the money supply: state and local governments, emerging economies that issue dollar-denominated debt, EMU countries that issue debt in euros, federal governments that abide by the gold standard or delegate control of the money supply to an independent central bank with a preference for tight monetary policy.

The only exception to this that a mainstream economist might make is for the case of "debt" in the form of currency. The seigniorage revenue generated by currency (zero-interest debt), however, is typically considered to be small potatoes. Consider the United States, for example. Let's interpret D as currency. Currency in circulation is presently around $1.7 trillion, almost 10% of GDP. So let's set (D/Y) = 0.10, R = 1, and n = 1.05 in equation [*]. If I've done my math correctly, I get (S/Y) = 0.0025, or (1/4)% of GDP. That's about $100 billion. This may not sound like "small potatoes" to you and me, but it is for a government whose expenditures in 2018 totaled about $4 trillion.

The New and Modern Monetarist View

I think of "monetarists" as those who view money and banking as critical factors in determining macroeconomic activity. I'm thinking, for example, of people like Friedman, Tobin, Wallace, Williamson and Wright (old and new monetarists) on the mainstream side and, for example, Godley, Minksy, Wray, Fullwiler on the MMT (and other heterodox) side. A common ground shared by new/modern monetarists is the view of treasury debt as a form of money; i.e., the difference between (say) U.S. Treasury debt and Federal Reserve money is more of degree than in kind. Consider, for example, the following two objects:


Can you spot the difference?  The first one was issued by the U.S. Treasury and the second one by the Federal Reserve (the promised redemption for silver has long since been suspended). The Fed is said to "monetize the debt" when it replaces the top bill with the bottom bill. Is it any wonder why the BoJ cannot create inflation by swapping zero-interest BoJ reserves for zero-interest JGBs? (In case you're interested, see my piece here.)

In any case, rightly or wrongly, U.S. government policy presently renders the treasury bill illiquid (in the sense that it cannot easily be used to make payments). Of course, while the treasury bill no longer exists in physical form, every U.S. person can acquire the electronic version of (interest-bearing) T-bills at www.treasurydirect.gov. Just don't expect to be able to pay your rent or groceries with your treasury accounts any time soon. (Though, as I have argued elsewhere, it would be a simple matter to integrate treasury direct accounts with a real-time gross settlement payment system.)

But even if treasury securities cannot be used to make everyday payments, they are still liquid in the sense of being readily convertible into money on secondary markets (and maybe one day, on a Fed standing repo facility, as Jane Ihrig and I suggest here and here). USTs are used widely as collateral in credit derivative and repo markets -- they constitute a form of wholesale money. Because they are safe and liquid securities, they can trade at a premium. A high price means a low yield and, in particular, R < n is a distinct possibility for these types of securities.

In fact, R < n seems to be the typical case for the United States.


The only exception in this sample is in the early 1980s -- the consequence of Volcker's attempt to reign in inflation.

But if this is the case, then the mainstream view has long neglected a source of seigniorage revenue beyond that generated by currency. Low-yielding debt can also serve as a revenue device, as made clear by condition [*] above. How much is this added seigniorage revenue worth to the U.S. government?

Let's do the arithmetic. For the United States, the (gross) debt-to-GDP ratio is now about 105%, so let's set (D/Y) = 1.0.  Let's be optimistic here and assume that the average yield on USTs going forward will average around 2%, so R = 1.02. As before, assume NGDP growth of 5%, or n = 1.05. Condition [*] then yields (S/Y) = 0.03, or 3% of GDP. That's about $600 billion.

$600 billion is considerably more than $100 billion, but it's still small relative to an expenditure of $4 trillion. And, indeed, since the budget deficit is presently running at around $800 billion, there seems little scope to increase it without inducing inflationary pressure. (Note: by "increase it" I mean increase it relative to GDP. In the examples above, the debt and deficit all grow with GDP at 5% per year).

Conclusion

What does this mean for fiscal policy going forward? The main conclusion is that the present rate of deficit spending and high level of debt-to-GDP is not something to be alarmed about (especially with inflation running below 2%). The national debt can, will, and probably should continue to grow indefinitely along with the economy. What matters more is how expenditures are directed and how taxes are collected. Of course, this should be done with an eye to keeping long-term inflation in check.

What deserves our immediate attention, in my view, is a re-examination of the mechanisms through which government spending (when, where and how much) is determined. This is not the place to get into details, but suffice it to say that one should hope that our elected representatives have a capacity to reason effectively, have a broad understanding of history, are willing to listen, and do not view humility and compromise as four-letter words or signs of personal weakness. If we don't have this, then we have much deeper problems to deal with than the national debt or deficits.

Once the spending priorities have been established, the question of finance needs to be addressed. If the level of spending is less than 2% of GDP, then explicit taxes can be set to zero--seigniorage revenue should suffice. However, if we're talking 20% of GDP then tax revenue is necessary (at least, if the desired inflation target is to remain at 2%). If the tax system is inefficient and cannot be changed, this may mean cutting back on desired programs. Ideally, of course, the tax system could be redesigned to minimize inefficiencies and distortions. But tax considerations are likely always to remain in some form and, because this is the case, they should be taken into consideration when evaluating the net social payoff to any new expenditure program.

As President Obama's popularity numbers continue to drop, Republicans are still struggling to find the right candidate that can deliver the final blow to the incumbent and sweep the GOP back into the White House. Rick Perry was to be this man just three weeks ago, but after less than stellar performances in the last debates, and once his record had been scrutinized by his challengers and the press, he has fallen out of grace. The Texan governor was perceived as the man that could attract Tea Partiers and base primary voters, while at the same time satisfy deep-pocketed Republican donors with his solid conservative views on the economy and the role of government. However, the GOP establishment and its largest donors are uncomfortable with some of his public statements (for example, referring to Social Security as a Ponzi scheme, voicing his creationist and anti-science views, and his reactionary pro-gun position) which would make him less electable in the national race. Many of these rich donors and Wall Street executives are economic conservatives but quite liberal on social issues. Paradoxically, Mitt Romney, who is still first in all the polls, has the right mix for Wall Street, but his religious affiliation (Mormon), his lack of charisma and his "plastic" "salesman-like" persona raise questions about whether he can connect with the base and win the primary election.In this theater of the absurd that have been the candidate debates, Perry did well at first, but then stumbled last week in Florida, when confronted with his own record as governor of Texas. He has been severely criticized by Michelle Bachman for issuing an executive order to vaccinate middle school girls against HPPV in Texas, and in his second debate he was mobbed by his fellow candidates for allowing the children of undocumented immigrants to attend state universities paying the lower "in-state" tuition rate, just like any other Texan legal resident. Even though 70% of the national electorate supports Immigration Reform and the Dream Act (which includes a provision exactly like the one Perry took), and even though the Latino vote will be fundamental in the next election, he was pilloried over it. This is the kind of wedge issue that candidates on the Right can use successfully during the primary but will work against them in the national election.Perry's confidence seemed shaken for the rest of the debate: he dodged several questions, mumbled responses and looked down at his notes several times. In contrast, Romney, smooth, fresh- faced and articulate, seemed to be having a great time delivering sharp retorts that threw the Texan off balance. From Perry's demeanor one could tell he was unpleasantly surprised by the aggressive questioning of his policies and the mocking tone of his opponent. Clearly, he is a man of authority who is not used to having his decisions and beliefs openly criticized by others. He defended himself as best as he could, but the damage had been done. Consequently, Rick Perry, the GOP's "knight in shining armor" who was urged to run by the GOP establishment and was supposed to deliver the ultimate blow to Obama, lost his appeal overnight and is now struggling to keep his campaign alive. Aware of this great opportunity to win the White House, the GOP establishment continues second-guessing its own field, looking for perfect contender that can lead them into a new era. Romney, still the de facto front-runner, has become a much better candidate in the last four years, but his inner restraint, his lack of emotion, his failure to connect makes Republicans uneasy. He is a technocrat, the type of candidate the voters can't "fall in love with", and while he can take on Obama as an equal, it is not clear whether he can beat him. So the GOP moved ahead in its inexorable quest for the unbeatable candidate, all but destroying former favorites on its way. The new favorite last week was for a while Chris Christie, the first-term governor of New Jersey and a former state prosecutor. In deep contrast with Mitt Romney the "salesman", Chris Christie, the "Jersey big guy" had a certain quality of authenticity that heightened GOP expectations and made them dream of winning again. Some hefty figures in the party establishment (former statesman Henry Kissinger and conservative intellectual William Kristol among them) were putting enormous pressure on Christie to run. He quickly has become a favorite among conservatives because of his stunning achievements: a Republican governor in a "blue" state who managed to pass budget reform, take on the teachers' unions and reform the state pension system during his first two years in office. He is a big man who speaks bluntly, a terrific governor, a leader at a time when leadership is hard to find. But after ten days of high drama and speculation, Christie announced in a one-hour press conference last Friday that he was not running.There were three main reasons for his refusal to become a candidate for the highest office in the nation: First and foremost, his decision would have come too late. At the time, there were only ninety days until the first caucus in Iowa; Florida has set an earlier-than-expected date for its primary and with that, it has pushed back all other dates in the calendar so that voting may start even earlier than expected. The order of primaries is traditionally set and the privileged states (Iowa, New Hampshire and South Carolina) would be loath to change it. Governor Christie's campaign would have had to scramble to get his name on the ballot of all 50 states (each state has different procedures, from the very simple to the very complex). Most agreed that he would have been a very strong candidate, but such a late entry may have harmed future prospects for him. Second, Christie is still an unknown to most of the electorate, and probably would not have had the support of rural and Southern voters. Would the wealthy New Yorkers and party pundits who were promising him huge donations ultimately have delivered and stayed with Christie for the long-term if he lost some of the early caucuses and primaries? And finally, there was the question of whether he would ignite the primary base once some of his views became known. His record is clear on management of state finances and on standing up to public unions. But there has been scarcely any scrutiny about his views on immigration. Speaking to a Latino group in 2008, he said for example that undocumented immigrants should not be classified as "illegal" since: being in this country without proper documentation was not a crime." He is a moderate on abortion, he has banned drilling for oil off the coast of New Jersey, and his energy plan resembles Obama. These are all core concerns of the base which has been driven by mainly primordial instincts in the last four years. Would Christie's blunt leadership style and reform zeal, his sincerity about the depth of the challenges and the difficulties of the solutions have carried the day? Now, it seem we will never know, but it is the phenomenon itself that is worth pondering: the establishment is unhappy at the prospects of Perry in the national election, and worried about Romney's chances in the primary. In their quasi-irrational frenzy to find the perfect candidate they may be undermining their own chance to win.Republicans seem to be looking for the anti-Obama, and Chris Christie fitted the bill: he is a heavy, no nonsense guy (a lot has been said about his overweight condition, with one NBC journalist going as far as asking the question: "Should there be a weight limit for presidential candidates?") who speaks in a very direct way, does not shirk away from difficult decisions, is ready to take on opponents and do whatever is required to get the country's economy back on track. There is nothing Hamlet-like about him, except perhaps in his hesitancy about running for president. He is also a very bright policy wonk who completely "gets" New Jersey problems and knows what needs to be done to "fix" them. On the other hand, although flattered by all the attention and support for his candidacy, his decision was due to a sincere self-appraisal: he is not ready to be President of the United States in 2012, and prefers to wait until 2016 if his aura has not worn out by then.In the meantime, Obama is trying to persuade Congress to pass his jobs bill and to show that in spite of the seemingly insurmountable obstacles he has faced at every turn of the road, he has the strength to solve at least one problem, unemployment, and the courage to tax those that make over a million a year. His jobs bill includes many Republican ideas. It proposes a combination of shot-term tax cuts, investment incentives and job creation through infrastructure projects, with long-term strategy of tax reform including ending tax loopholes for corporations which would reduce the deficit by raising the government's revenue levels. He still strikes an optimistic note, but he has already recognized that, if the economy doesn't pick up by early next year, he will be running as the underdog. In other words, he has admitted that the solution is really out of his control and in the hands of what John M. Keynes called "animal spirits". Only by restoring confidence will investors start spending the 2 trillion dollars they are allegedly stashing away in wait of better times. But Obama has now a new challenge: the Occupy Wall Street protest movement that is expanding its base and spreading to other cities. It is the unemployed youth counterpart of the populist Tea Party on the right. Both are angry at Washington, but the reactionary Tea Party blames the government for everything gone wrong, while the radical OWS blames big banks and corporations, or said otherwise, it blames the 1% that have gotten richer even during the Recession, while the 99% got poorer. With its protest movement, the Young Left has declared its independence from the establishment Democratic Party. It is Obama's base delivering Obama himself an ultimatum to either take the side of the 99% or lose their support forever. Since Obama's dreams of bipartisanship are close to over, one hopes his campaign advisors will interpret the OWS movement as an opportunity to harness their energy towards support for real reform. But it is unclear whether OWS, a diverse, amorphous, leaderless movement, will allow itself to be organized by Washington insiders with clear policy goals.The GOP frustration must be disheartening. Its establishment saw the enormous potential of Governor Christie to win the center-right of the political spectrum and with it, the national election. His remarkable success at striking bipartisan deal to reform New Jersey's finances proves his bona fide credentials as a problem solver and a leader. His irreverent, unscripted yet incisive responses to the press and the public, his indubitable charisma and his authenticity all worked in his favor. However, his refusal to run is now a fact, and as the deadline looms nearer, the GOP will have to reconsider whether to anoint as its candidate Mitt Romney, the Mormon, affable yet one-dimensional former governor of Massachusetts, the most progressive state in the nation, or Rick Perry, the less articulate yet pragmatic and successful governor of Texas, the biggest and most conservative state. Of course, unexpected outcomes are always a possibility, as shown by Herman Cain's case. The African American candidate and former Godfather's Pizza executive who has never held public office, won the "straw" primary poll in Florida last week and saw his popularity soar in national polls after a very well-received debate performance in which he repeated over and over again his simplistic 9-9-9 tax reform program, his plan to privatize pension funds, and his anti-Washington mantra. "Salesmanship", then, is not a bad asset in politics, after all, unless you are also a Mormon millionaire.Senior Lecturer, Department of Political Science and Geography Director, ODU Model United Nations Program Old Dominion University, Norfolk, Virginia

The Silicon Valley Bank failure strikes me as a colossal failure of bank regulation, and instructive on how rotten the whole edifice is. I write this post in an inquisitive spirit. I don't know the details of how SVB was regulated, and I hope some readers do and can chime in. As reported so far by media, the collapse was breathtakingly simple. SVB paid a bit higher interest rates than the measly 0.01% (yes) that Chase offers. It attracted large deposits from venture capital backed firms in the valley. Crucially, only the first $250,000 are insured, so most of those deposits are uninsured. The deposits are financially savvy customers who know they have to get in line first should anything go wrong. SVB put much of that money into long-maturity bonds, hoping to reap the difference between slightly higher long-term interest rates and what it pays on deposits.  But as we've known for hundreds of years, if interest rates rise, then the market value of those long-term bonds fall. Now if everyone comes asking for their money back, the assets are not worth enough to pay everyone back.  In sum, you have "duration mismatch" plus run-prone uninsured depositors. We teach this in the first week of an MBA or undergraduate banking class. This isn't crypto or derivatives or special purpose vehicles or anything fancy. Where were the regulators? The Dodd Frank act added hundreds of thousands of pages of regulations, and an army of hundreds of regulators. The Fed enacts "stress tests" in case regular regulation fails. How can this massive architecture fail to spot basic duration mismatch and a massive run-prone deposit base? It's not hard to fix, either. Banks can quickly enter swap contracts to cheaply alter their exposure to interest rate risk without selling the whole asset portfolio. Michael Cembalist assembled numbers. This wasn't hard to see. Even Q3 2022 -- a long time ago -- SVB was a huge outlier in having next to no retail deposits (vertical axis, "sticky" because they are insured and regular people), and a huge asset base of loans and securities. Michael then asks .. how much duration risk did each bank take in its investment portfolio during the deposit surge, and how much was invested at the lows in Treasury and Agency yields? As a proxy for these questions now that rates have risen, we can examine the impact on Common Equity Tier 1 Capital ratios from an assumed immediate realization of unrealized securities losses ... That's what is shown in the first chart: again, SVB was in a duration world of its own as of the end of 2022, which is remarkable given its funding profile shown earlier.Again, in simpler terms. "Capital" is the value of assets (loans, securities) less debt (mostly deposits). But banks are allowed to put long-term assets into a "hold to maturity" bucket, and not count declines in the market value of those assets. That's great, unless people knock on the door and ask for their money now, in which case the bank has to sell the securities, and then it realizes the market value. Michael simply asked how much each bank was worth in Q42002 if it actually had to sell its assets. A bit less in each case -- except SVB (third from left) where the answer is essentially zero. And Michael just used public data. This is not a hard calculation for the Fed's team of dozens of regulators assigned to each large bank. Perhaps the rules are at fault? If a regulator allows "hold to maturity" accounting, then, as above, they might think the bank is fine. But are regulators really so blind? Are the hundreds of thousands of pages of rules stopping them from making basic duration calculations that you can do in an afternoon? If so, a bonfire is in order. This isn't the first time. Notice that when SBF was pillaging FTX customer funds for proprietary trading, the SEC did not say "we knew all about this but didn't have enough rules to stop it." The Bank of England just missed a collapse of pension funds who were doing exactly the same thing: borrowing against their long bonds to double up, and forgetting that occasionally markets go the wrong way and you have to sell to make margin calls. (That's week 2 of the MBA class.)  Ben Eisen and Andrew Ackerman in WSJ ask the right question (10 minutes before I started writing this post!) Where Were the Regulators as SVB Crashed? "The aftermath of these two cases is evidence of a significant supervisory problem," said Karen Petrou, managing partner of Federal Financial Analytics, a regulatory advisory firm for the banking industry. "That's why we have fleets of bank examiners, and that's what they're supposed to be doing."The Federal Reserve was the primary federal regulator for both banks.Notably, the risks at the two firms were lurking in plain sight. A rapid rise in assets and deposits was recorded on their balance sheets, and mounting losses on bond holdings were evident in notes to their financial statements.moreover, "Rapid growth should always be at least a yellow flag for supervisors," said Daniel Tarullo, a former Federal Reserve governor who was the central bank's point person on regulation following the financial crisis...In addition, nearly 90% of SVB's deposits were uninsured, making them more prone to flight in times of trouble since the Federal Deposit Insurance Corp. doesn't stand behind them.90% is a big number. Hard to miss.  The article echoes some confusion about "liquidity"SVB and Silvergate both had less onerous liquidity rules than the biggest banks. In the wake of the failures, regulators may take a fresh look at liquidity rules,...This is absolutely not about liquidity. SBV would have been underwater if it sold all its securities at the bid prices. Also Silvergate and SVB may have been particularly susceptible to the change in economic conditions because they concentrated their businesses in boom-bust sectors...That suggests the need for regulators to take a broader view of the risks in the financial system. "All the financial regulators need to start taking charge and thinking through the structural consequences of what's happening right now," she [Saule Omarova] saidAbsolutely not! I think the problem may be that regulators are taking "big views," like climate stress tests. This is basic Finance 101 measure duration risk and hot money deposits. This needs a narrow view! There is a larger implication. The Fed faces many headwinds in its interest rate raising effort. For example, each point of higher real interest rates raises interest costs on the debt by about $250 billion (1 percent x 100% debt/GDP ratio). A rate rise that leads to recession will lead to more stimulus and bailout, which is what fed inflation in the first place. But now we have another. If the Fed has allowed duration risk to seep in to the too-big to fail banking system, then interest rate rises will induce the hard choice between yet more bailout and a financial storm. Let us hope the problem is more limited - as Michael's graphs suggest. Why did SVB do it? How could they be so blind to the idea that interest rates might rise? Why did Silicon Valley startups risk cash, that they now claim will force them to bankruptcy, in uninsured deposits? Well, they're already clamoring for a bailout. And given 2020, in which the Fed bailed out even money market funds, the idea that surely a bailout will rescue us should anything go wrong might have had something to do with it. (On the startup bailout. It is claimed that the startups who put all their cash in SVB will now be forced to close, so get going with the bailout now. It is not startups who lose money, it is their venture capital investors, and it is they who benefit from the bailout. Let us presume they don't suffer sunk cost fallacy. You have a great company, worth investing $10 million. The company loses $5 million of your cash before they had a chance to spend it. That loss obviously has nothing to do with the company's prospects. What do you do? Obviously, pony up another $5 million and get it going again. And tell them to put their cash in a real bank this time.) How could this enormous regulatory architecture miss something so simple? This is something we should be asking more generally. 8% inflation. Apparently simple bank failures. What went wrong? Everyone  I know at the Fed are smart, hard working, honest and dedicated public servants. It's about the least political agency in Washington. Yet how can we be seeing such simple o-ring level failures? I can only conclude that this overall architecture -- allow large leverage, assume regulators will spot risks -- is inherently broken. If such good people are working in a system that cannot spot something so simple, the project is hopeless. After all, a portfolio of long-term treasuries is about the safest thing on the planet -- unless it is financed by hot money deposits. Why do we have teams of regulators looking over the safest assets on the planet? And failing? Time to start over, as I argued in Towards a run free financial systemOr... back to my first question, am I missing something? ****Updates: A nice explainer thread (HT marginal revolution). VC invests in a new company. SVB offers an additional few million in debt, with one catch, the company must use SVB as the bank for deposits. SVB invests the deposits in long-term mortgage backed securities. SVB basically prints up money to use for its investment! "SVB goes to founders right after they raise a very, very expensive venture round from top venture firms offering:- 10-30% of the round in debt- 12-24 month term- interest only with a balloon payment- at a rate just above prime For investors, it also seems like a no-downside scenario for your portfolio: Give up 10-25 bps in dilution for a gigantic credit facility at functionally zero interest rate.If your PortCo doesn't need it, the cash just sits. If they do, it might save them in a crunch. The deals typically have deposit covenants attached. Meaning: you borrow from us, you bank with us.And everyone is broadly okay with that deal. It's a pretty easy sell! "You need somewhere to put your money. Why not put it with us and get cheap capital too?"Update:1) Old Eagle Eye's comment below is fascinating. I am getting the sense that the rules actually preclude putting 2+2=4 together here. Copied here in totoSIVB did have a hedge put on during 2022, but it was limited to its available-for-sale securities ("AFS"). It was precluded from hedging its interest rate risk in held-to-maturity securities ("HTM") by U.S. GAAP rules. [My emphasis] Here is the explanation found at PwC:[PWC Viewpoint Commentary: "The notion of hedging the interest rate risk in a security classified as held to maturity is inconsistent with the held-to-maturity classification under ASC 320, which requires the reporting entity to hold the security until maturity regardless of changes in market interest rates. For this reason, ASC 815-20-25-43(c)(2) indicates that interest rate risk may not be the hedged risk in a fair value hedge of held-to-maturity debt securities." "ASC 815-20-25-12(d) provides guidance on the eligibility of held-to-maturity debt securities for designation as a hedged item in a fair value hedge."][Extracted subsection:"Chapter 6: Hedges of financial assets and liabilities. "6.4 Hedging fixed-rate instruments"6.4.3.4 Hedging held-to-maturity debt securities"ASC 815-20-25-12(d)"If the hedged item is all or a portion of a debt security (or a portfolio of similar debt securities) that is classified as held to maturity in accordance with Topic 320, the designated risk being hedged is the risk of changes in its fair value attributable to credit risk, foreign exchange risk, or both. If the hedged item is an option component of a held-to-maturity security that permits its prepayment, the designated risk being hedged is the risk of changes in the entire fair value of that option component. If the hedged item is other than an option component of a held-to-maturity security that permits its prepayment, the designated hedged risk also shall not be the risk of changes in its overall fair value."]Source: PWC Viewpoint (viewpoint.pwc.com) Publication date: 31 Jul 2022https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/derivatives_and_hedg/derivatives_and_hedg_US/chapter_6_hedges_of__US/64_hedging_fixedrate_US.htmlUpdate 2: Thanks to anonymous below for a pointer to a good New York Times article about SVB, what the Fed knew and when. Apparently the bank's supervisors knew about problems for a long time before the bank failed. Whether this is good or bad news for the regulatory project I leave to you. 

This issue of the Review begins with an article by the Mexican economist Arturo Guillén Romo on the main tensions in the world economy and trade since the 2007-08 crisis and the recession of the following years. It highlights the loss of land of the United States in production, international trade and foreign direct investment, although preserving a clear military advantage. One conclusion that it is possible to extract the text is the configuration of a scenario in which it is plausible to expect a consolidation of control by the United States over its areas of influence, including Latin America, as part of its strategy against the European Union, Russia and especially China. In this context, the condition of EE. USA As a majority shareholder of the IMF, he raises an element of particular complexity regarding the strategy of re-profiling the external debt and vis-à-vis the multilateral organization, which represents one of the ingredients of the US-Argentina bilateral relationship. Guillén Romo's text allows us to discern the scenario in which Argentina will move, trying to take advantage of the reconfigurations of power relations at the global level. The following three articles approach the territorial dimension of social processes and the ways in which they are determined from different angles, but complementary. The text by Lucas Ferrero and Alejandro San José analyzes the formation of the Argentine socioeconomic and demographic structure and the dynamics of population agglomeration and expulsion from the periphery in the peripheral regions, stories from the Northeast and Northwest regions. In counterpoint from the territorial point of view but as a complement to the synergy between protocols and regulations, structural trends and performance of private actors, the article by Verónica Pérez and Jorge Sánchez sets its sights on the organization and performance of the motor transport sector public transport in the Metropolitan Region of Buenos Aires and its variations in the last ninety years, and the importance of this service in the design of the area throughout almost a century. For its part, the work of Letizia Vazquez, Sergio Andrés Kaminker and Renata Hiller reconstructs how a national public policy differentially impacts different territories according to local socioeconomic contexts and different actors. The differential results of the program in two localities allow us to affirm the importance of local networks when formulating a national policy. The popular economy, or social economy, has proven to be, in its multiple expressions and spheres of development, much more than a survival resource for those excluded from the labor market by the regressive dynamics of neoliberalism. The articles by Claudia Cabrera and María Victoria Deux Marzi focus from various angles on the rich problems offered by the articulation between popular organization, insertion in commercial relations and modalities of state intervention. Cabrera's research in the Buenos Aires suburbs aims to analyze the strategies of social reproduction of the homes of the popular economy that live in neighborhoods that were accessed outside the formal real estate market. According to the author, the popular economy finds its conditions of possibility in the territory; therefore there is a rationality of adaptation to the environment by those who join it; This means that it is not possible to explain the particularities of the reproduction strategies of households outside the territories they inhabit. Frequently the specificity of the modes of labor insertion in these contexts collides with the taxonomic systems of framing of the occupations of the workers; hence the inadequacy of conventional statistical categories to account for the variety of concrete situations that arise, thus posing a theoretical and methodological challenge to conventional forms of social research. Deux Marzi's article reconstructs the policies of the national state promoting the popular economy between 2015 and 2019, a period of government in sharp contrast, in this as in many other aspects of public policy, with which it preceded it. His vision encompasses both the public organizations that during that period managed the policies related to the sector, as well as the programs carried out, the actors involved and the various types of intervention. The author highlights the predominant orientation of interventions lacking a broader and more inclusive approach to the various modalities of the popular economy, which could have promoted productive and labor strategies. Obviously, the predominant paradigm in the theoretical and philosophical conceptions of neoliberal administration - centered on individualism, interindividual competition, entrepreneurship - went against the community and solidarity dimension, which is one of the central characteristics of the schemes of the economy. popular. The following two articles, although dedicated to different topics, raise the necessary adaptation of the large intellectual categories that guide the design of institutions and public policies, with the need to narrow the gap between these designs and their effective implementation, the product of a variety of factors derived from the scenarios or the actors involved in different ways in this dimension of politics. Matías Mattalini presents a case study of the system for the promotion and protection of the rights of children and adolescents in the province of Buenos Aires. In it, he distinguishes various paradigms or models of approach: social representations derived from practices, devices and structures that address the problem according to the dominant vision of an era. The author adopts the position of the coexistence of paradigms assuming that, when exploring the institutional daily life of organizations dedicated to this problem, a plurality of practices emerge that tend to establish from below an institutionality based on institutional co-responsibility. Appealing to the categories of analysis of the political philosophy of Raymond Williams, María Alejandra Bowman and Mariana Tosolini focus their gaze on the implementation of two public policies in recent Argentine history, in individual moments of profound sociopolitical and ideological differentiation, present in the policies under examination: the Adult Educational Reactivation for Reconstruction Campaign developed between 1973 and 1975, and the Youth with More and Better Work Program created in 2008. According to the authors, Williams' analytical categories contribute to clearing the dynamics of resignification of the policies, between the definitions formulated from the state instances, the administrative interventions of the policy managers, and the meanings that the subjects assign to the normative prescriptions from their links with the institutions, to their conceptions of the world and the way these are lived. A proposition whose scope goes far beyond the policies examined, insofar as it points to the conceptual and operational gap that usually exists between the design of policies and their effective implementation. ; Este número de la Revista se inicia con un artículo del economista mexicano Arturo Guillén Romo sobre las principales tensiones en la economía y el comercio mundial a partir de la crisis de 2007-08 y la recesión de los años siguientes. Se destaca en él la pérdida de terreno de Estados Unidos en la producción, el comercio internacional y la inversión extranjera directa, aunque preservando una clara ventaja militar. Una conclusión que es posible extraer del texto es la configuración de un escenario en el que es plausible esperar una consolidación del control de Estados Unidos sobre sus zonas de influencia, entre ellas América Latina, como parte de su estrategia frente a la Unión Europea, Rusia y, especialmente, China. En este contexto, la condición de EEUU de accionista mayoritario del FMI plantea un elemento de particular complejidad respecto de la estrategia de reperfilamiento de la deuda externa y frente al organismo multilateral y que deviene uno de los ingredientes de la relación bilateral EEUU-Argentina. El texto de Guillén Romo, permite discernir el escenario en el que necesariamente habrá de moverse Argentina, intentando sacar ventaja de las reconfiguraciones de las relaciones de fuerza en el plano global. Los tres artículos siguientes abordan desde ángulos diversos pero complementarios la dimensión territorial de los procesos sociales y los modos en que éstos contribuyen a la producción de aquél. El texto de Lucas Ferrero y Alejandro San José analiza la formación de la estructura socioeconómica y demográfica argentina y las dinámicas de aglomeración y expulsión poblacional de la periferia en las regiones periféricas, considerando tales las regiones Noreste y Noroeste. En contrapunto desde el punto de vista territorial pero como complemento en cuanto a la sinergia entre intervenciones y regulaciones estatales, tendencias estructurales y desempeño de los actores privados, el artículo de Verónica Pérez y Jorge Sánchez pone la mira en la organización y desempeño del sector del autotransporte público de pasajeros en la Región Metropolitana de Buenos Aires y sus variaciones en los últimos noventa años, y la gravitación de este servicio en el diseño del área a lo largo de casi un siglo. Por su parte, el trabajo de Letizia Vazquez, Sergio Andrés Kaminker y Renata Hiller reconstruye el modo en que una política pública nacional impacta de manera diferencial en distintos territorios de acuerdo con los contextos socioeconómicos locales y los diferentes actores. Los resultadosdiferenciales del programa en dos localidades permiten afirmar la importancia de los entramados locales a la hora de formular una política de alcance nacional. La economía popular, o economía social, ha probado ser en sus múltiples expresiones y ámbitos de desarrollo, mucho más que un recurso de sobrevivencia para los excluidos del mercado de trabajo por la dinámica regresiva del neoliberalismo. Los artículos de Claudia Cabrera y de María Victoria Deux Marzi enfocan desde ángulos variados la rica problemática que ofrece la articulación entre organización popular, inserción en relaciones mercantiles y modalidades de intervención estatal. La investigación de Cabrera en el conurbano bonaerense tiene por objeto el análisis de las estrategias de reproducción social de los hogares de la economía popular que habitan en barrios a los que accedieron por fuera del mercado inmobiliario formal. De acuerdo a la autora la economía popular encuentra en el territorio sus condiciones de posibilidad; hay por lo tanto una racionalidad de adaptación al medio por parte de quienes se incorporan a ella; esto significa que no es posible explicar las particularidades de las estrategias de reproducción de los hogares por fuera de los territorios que ellos habitan. Frecuentemente la especificidad de los modos de inserción laboral en estos contextos entra en colisión con los sistemas taxonómicos de encuadre de las ocupaciones de los trabajadores; de ahí la inadecuación de las categorías estadísticas convencionales para dar cuenta de la variedad de situaciones concretas que se presentan, planteando de esta manera un desafío teórico y metodológico a las formas convencionales de investigación social. El artículo de Deux Marzi reconstruye las políticas del Estado nacional de promoción de la economía popular entre 2015 y 2019, un periodo de gobierno de fuerte contraste, en este como en otros muchos aspectos de las políticas públicas, con el que le precedió. Su mirada abarca tanto a los organismos públicos que durante ese periodo gestionaron las políticas referidas al sector, como los programas ejecutados, los actores involucrados y las variadas modalidades de intervención. Destaca la autora la orientación predominante de las intervenciones carentes de un abordaje más amplio e integrador de las varias modalidades de la economía popular, que podrían haber potenciado las estrategias productivas y laborales. Obviamente, el paradigma predominante en las concepciones teóricas y filosóficas de la administración neoliberal -centradas en el individualismo, la competencia interindividual, el emprendedorismo- iban en contra de la dimensión comunitaria y solidaria que es una de las características centrales de los esquemas de la economía popular. Los dos artículos siguientes, aunque dedicados a diferentes temas, plantean la necesaria adecuación de las grandes categorías intelectuales que orientan el diseño de las instituciones y las políticas públicas, con la necesidad de achicar el desfase de esos diseños y su efectiva implementación, producto de una variedad de factores derivados de los escenarios o los actores involucrados de diversa manera en esta dimensión de la política. Matías Mattalini presenta un estudio de caso del sistema de promoción y protección de los derechos de la niñez y la adolescencia en la provincia de Buenos Aires. En él distingue diversos paradigmas o modelos de abordaje: representaciones sociales devenidas en prácticas, dispositivos y estructuras que abordan la problemática según la visión dominante de una época. El autor adopta la postura de la convivencia de paradigmas asumiendo que, al explorar la cotidianeidad institucional de las organizaciones dedicadas a esta problemática, emerge una pluralidad de prácticas que tienden a instaurar desde abajo una institucionalidad basada en la corresponsabilidad institucional. Apelando a las categorías de análisis de la filosofía política de Raymond Williams, María Alejandra Bowman y Mariana Tosolini centran su mirada en la implementación de dos políticas públicas de la historia reciente argentina, en sendos momentos de profunda diferenciación sociopolítica e ideológica, presentes en las políticas bajo examen: la Campaña de Reactivación Educativa de Adultos para la Reconstrucción desarrollada entre los años 1973 y 1975, y el Programa Jóvenes con Más y Mejor Trabajo creado en 2008. De acuerdo a las autoras, las categorías analíticas de Williams contribuyen a despejar la dinámica de resignificación de las políticas, entre las definiciones formuladas desde las instancias estatales, las intervenciones administrativas de los gestores de las políticas, y los sentidos que los sujetos asignan a las prescripciones normativas a partir de sus vínculos con las instituciones, a sus concepciones de mundo y al modo en que estas son vividas. Una proposición cuyo alcance va mucho más allá de las políticas examinadas, en cuanto apunta al desfase conceptual y operativo que suele existir entre el diseño de las políticas y su efectiva implementación.

Banks perform important functions for the economy. Besides financial intermediation, banks provide information, liquidity, maturity- and risk-transformation (Fama, 1985). Banks ensure the transfer of liquidity from depositors to the most profitable investment projects. In addition, they perform important screening and monitoring services over investments hence contributing steadily to the efficient allocation of resources across the economy (Pathan and Faff, 2013). Since banks provide financial services all across the economy, this exposes banks (as opposed to non-banks) to systemic risk: the recent financial crisis revealed that banks can push economies into severe recessions. However, the crisis also revealed that certain bank types appear far more stable than others. For instance, cooperative banks performed better during the crisis than commercial banks. Different business models may reason these performance-differences: cooperative banks focus on relationship lending across their region, hence these banks suffered less from the collapse of the US housing market. Since cooperative banks performed better during the crisis than commercial banks, it is quite surprising that research concerning cooperative banks is highly underrepresented in the literature. For this reason, the following three studies aim to contribute to current literature by examining three independent contemporaneous research questions in the context of cooperative banks. Chapter 2 examines whether cooperative banks benefit from revenue diversification: Current banking literature reveals the recent trend in the overall banking industry that banks may opt for diversification by shifting their revenues to non-interest income. However, existing literature also shows that not every bank benefits from revenue diversification (Mercieca et al., 2007; Stiroh and Rumble, 2006; Goddard et al., 2008). Stiroh and Rumble (2006) find that large commercial banks (US Financial Holding Companies) perceive decreasing performance by shifting revenues towards non-interest income. Revenues from cooperative banks differ from those of commercial banks: commercial banks trade securities and derivatives, sell investment certificates and other trading assets. Concerning the lending business, commercial banks focus on providing loans for medium-sized and large companies rather than for small (private) customers. Cooperative banks rely on commission income (fees) from monetary transactions and selling insurances as a source of non-interest income. They generate most of their interest income by providing loans to small and medium-sized companies as well as to private customers in the region. These differences in revenues raise the question whether findings from Stiroh and Rumble (2006) apply to cooperative banks. For this reason, Chapter 2 evaluates a sample of German cooperative banks over the period 2005 to 2010 and aims to investigate the following research question: which cooperative banks benefit from revenue diversification? Results show that findings from Stiroh and Rumble (2006) do not apply to cooperative banks. Revenue concentration is positive related to risk-adjusted returns (indirect effect) for cooperative banks. At the same time, non-interest income is more profitable than interest income (direct effect). The evaluation of the underlying non-interest income share shows that banks who heavily focus on non-interest income benefit by shifting towards non-interest income. This finding arises due to the fact, that the positive direct effect dominates the negative indirect effect, leading in a positive (and significant) net effect. Furthermore, results reveal a negative net effect for banks who are heavily exposed to interest generating activities. This indicates that shifting to non-interest income decreases risk-adjusted returns for these banks. Consequently, these banks do better by focusing on the interest business. Overall, results show evidence that banks need time to build capabilities, expertise and experience before trading off return and risk efficiently with regard on revenue diversification. Chapter 3 deals with the relation between credit risk, liquidity risk, capital risk and bank efficiency: There has been rising competition in the European banking market due to technological development, deregulation and the introduction of the Euro as a common currency in recent decades. In order to remain competitive banks were forced to improve efficiency. That is, banks try to operate closer to a "best practice" production function in the sense that banks improve the input – output relation. The key question in this context is if banks improve efficiency at a cost of higher risk to compensate decreasing earnings. When it comes to bank risk, a large strand of literature discusses the issue of problem loans. Several studies identify that banks hold large shares of non-performing loans in their portfolio before becoming bankrupt (Barr and Siems, 1994; Demirgüc-Kunt, 1989). According to efficiency, studies show that the average bank generates low profits and incorporates high costs compared to the "best practice" production frontier (Fiordelisi et al., 2011; Williams, 2004). At first glance, these two issues do not seem related. However, Berger and DeYoung (1997) show that banks with poor management are less able to handle their costs (low cost-efficiency) as well as to monitor their debtors in an appropriate manner to ensure loan quality. The negative relationship between cost efficiency and non-performing loans leads to declining capital. Existing studies (e.g. Williams, 2004; Berger and DeYoung, 1997) show that banks with a low level of capital tend to engage in moral hazard behavior, which in turn can push these banks into bankruptcy. However, the business model of cooperative banks is based on the interests of its commonly local customers (the cooperative act: § 1 GenG). This may imply that the common perception of banks engaging in moral hazard behavior may not apply to cooperative banks. Since short-term shareholder interests (as a potential factor for moral hazard behavior) play no role for cooperative banks this may support this notion. Furthermore, liquidity has been widely neglected in the existing literature, since the common perception has been that access to additional liquid funds is not an issue. However, the recent financial crisis revealed that liquidity dried up for many banks due to increased mistrust in the banking sector. Besides investigating moral hazard behavior, using data from 2005 to 2010 this study moves beyond current literature by employing a measure for liquidity risk in order to evaluate how liquidity risk relates to efficiency and capital. Results mostly apply to current literature in this field since the empirical evaluation reveals that lower cost and profit-efficiency Granger-cause increases in credit risk. At the same time, results indicate that credit risk negatively Granger-causes cost and profit-efficiency, hence revealing a bi-directional relationship between these measures. However, most importantly, results also show a positive relationship between capital and credit risk, thus displaying that moral hazard behavior does not apply to cooperative banks. Especially the business model of cooperative banks, which is based on the interests of its commonly local customers (the cooperative act: § 1 GenG) may reason this finding. Contrary to Fiordelisi et al. (2011), results also show a negative relationship between capital and cost-efficiency, indicating that struggling cooperative banks focus on managing their cost-exposure in following periods. Concerning the employed liquidity risk measure, the authors find that banks who hold a high level of liquidity are less active in market related investments and hold high shares of equity capital. This outcome clearly reflects risk-preferences from the management of a bank. Chapter 4 examines governance structures of cooperative banks: The financial crisis of 2007/08 led to huge distortions in the banking market. The failure of Lehman Brothers was the beginning of government interventions in various countries all over the world in order to prevent domestic economies from even further disruptions. In the aftermath of the crisis, politicians and regulators identified governance deficiencies as one major factor that contributed to the crisis. Besides existing studies in the banking literature (e.g. Beltratti and Stulz, 2012; Diamond and Rajan, 2009; Erkens et al., 2012) an OECD study from 2009 supports this notion (Kirkpatrick, 2009). Public debates increased awareness for the need of appropriate governance mechanisms at that time. Consequently, politicians and regulators called for more financial expertise on bank boards. Accordingly, the Basel Committee on Banking Supervision states in principle 2 that "board members should remain qualified, individually and collectively, for their positions. They should understand their oversight and corporate governance role and be able to exercise sound, objective judgement about the affairs of the bank." (BCBS, 2015). Taking these perceptions into consideration the prevailing question is whether financial experts on bank boards do really foster bank stability? This chapter aims to investigate this question by referring to the study from Minton et al. (2014). In their study, the authors investigate US commercial bank holding companies between the period 2003 and 2008. The authors find that financial experts on the board of US commercial bank holding companies promote pro-cyclical bank performance. Accordingly, the authors question regulators view of more financial experts on the board leading to more banking stability. However, Minton et al. (2014) do not examine whether their findings accrue due to financial experts who act in the interests of shareholders or due to the issue that financial experts may have a more risk-taking attitude (due to a better understanding of financial instruments) than other board members. Supposed that their findings accrue due to financial experts who act in the interests of shareholders. Then financial experts on the board of banks where short-term shareholder interests play no role (cooperative banks) may prove beneficial with regard on bank performance during the crisis as well as in normal times. This would mean that they use their skills and expertise to contribute sustainable growth to the bank. Contrary, if this study reveals pro-cyclical bank performance related to financial experts on the board of cooperative banks, this finding may be addressed solely to the risk-taking attitude of financial experts (since short-term shareholder interests play no role). For this reason, this chapter aims to identify the channel for the relation of financial experts and bank performance by examining the following research question: Do financial experts on the board promote pro-cyclical bank performance in a setting where short-term shareholder interests play no role? Results show that financial experts on the board of cooperative banks (data from 2006 to 2011) do not promote pro-cyclical bank performance. Contrary, results show evidence that financial experts on the board of cooperative banks appear to foster long-term bank stability. This suggests that regulators should consider ownership structure (and hence business model of banks) when imposing new regulatory constraints for financial experts on the bank board. ; Banken nehmen wichtige Funktionen innerhalb einer Volkswirtschaft wahr. Innerhalb ihrer Rolle als Finanzintermediär stellen sie Liquidität bereit und übernehmen elementare Aufgaben der Fristen- und Risikotransformation (Fama ,1985). Sie stellen sicher, dass die Liquidität der Depotinhaber den profitabelsten Investitionsprojekten zukommt. Darüber hinaus übernehmen Banken wichtige Prüfungs- und Überwachungsfunktionen über ihre Investitionsprojekte und sorgen damit für eine stetig effiziente Ressourcenallokation innerhalb einer Volkswirtschaft (Pathan and Faff, 2013). Da jedoch Banken ihre Finanzdienstleistungen der gesamten Volkswirtschaft zur Verfügung stellen, erzeugen sie damit auch (im Gegensatz zu Firmen) ein gewisses Systemrisiko: die Finanzkrise 2007 – 2008 hat gezeigt, dass Banken ganze Staaten in eine Rezession ziehen können. Gleichzeitig hat die Krise allerdings auch gezeigt, dass bestimmte Banktypen deutlich stabiler sind als andere. So sind beispielsweise die genossenschaftlichen Volks- und Raiffeisenbanken deutlich besser durch die Krise gekommen als nahezu alle Universalbanken. Genossenschaftsbanken existieren in allen größeren westlichen Volkswirtschaften und nehmen innerhalb dieser oft eine bedeutende Rolle ein. Aufgrund der einerseits hohen Bedeutung von Genossenschaftsbanken in den genannten Volkswirtschaften und der andererseits vergleichsweise geringen Beachtung in der Literatur, ist es das Ziel dieser Dissertation mit den folgenden drei empirischen Studien die bestehende Forschung der Genossenschaftsbanken voranzutreiben. Die drei empirischen Studien beschäftigen sich mit jeweils unabhängigen Forschungsfragen, die für den Bankensektor in jüngster Zeit von hoher Relevanz sind. Kapitel 2 beschäftigt sich mit der Frage, welche Genossenschaftsbanken von einer Einnahmendiversifikation profitieren können: bestehende Literatur offenbart den Trend innerhalb des Bankensektors, wonach Banken nach Diversifikation streben, indem sie ihre Einnahmen immer stärker im zinsunabhängigen Geschäft generieren. Jedoch zeigt sich in der Literatur ebenfalls, dass längst nicht alle Banken durch die Einnahmendiversifikation profitieren (Mercieca et al., 2007; Stiroh and Rumble, 2006; Goddard et al., 2008). Bei der Untersuchung von Genossenschaftsbanken ergibt sich folgendes Bild: es profitieren diejenigen Banken von einer weiteren Einnahmendiversifikation, welche bereits einen hohen Anteil ihrer Einnahmen durch das zinsunabhängige Geschäft generieren. Des Weiteren zeigt die Untersuchung einen negativen Nettoeffekt für diejenigen Banken, welche den Großteil ihrer Einnahmen durch das Zinsgeschäft generieren. Insgesamt deuten die Hinweise der empirischen Untersuchung darauf hin, dass Banken eine gewisse Zeit benötigen um entsprechende Expertise und Erfahrung aufzubauen damit eine Einnahmendiversifikation eine konkurrenzfähige risikoadjustierte Rendite erzeugt. Kapitel 3 beschäftigt sich mit der Beziehung zwischen dem Risiko, der Kapitalausstattung und der Effizienz einer Bank. Das Geschäftsmodell von Genossenschaftsbanken beruht auf der Förderung der Interessen der Mitglieder (§ 1 GenG). Das legt die Vermutung nahe, dass die in der Literatur weit verbreitete Ansicht des moralischen Risikoverhaltens nicht auf Genossenschaftsbanken zutrifft. Darüber hinaus könnten die besonderen Governance-Strukturen von Genossenschaftsbanken diese These stützen: kurzfristige Eigentümerinteressen als mögliche Ursache für moralisches Risikoverhalten spielen bei Genossenschaftsbanken keine Rolle. Die Ergebnisse der empirischen Untersuchung von Genossenschaftsbanken zeigen, dass eine niedrigere Kosten- und Gewinneffizienz zu einem höheren Kreditrisiko führt. Gleichzeitig bestätigen die Ergebnisse, dass ein negativer Zusammenhang zwischen dem Kreditrisiko von Banken und deren Kosten- und Gewinneffizienz besteht. Als zentraler Unterschied zu bestehenden Studien zeigt sich jedoch, dass ein positiver Zusammenhang zwischen der Eigenkapitalposition und dem Kreditrisiko besteht. Das bedeutet, dass moralisches Risikoverhalten ("moral hazard") bei Genossenschaftsbanken, wie bereits vermutet, nicht stattfindet. Insbesondere der Zweck der Genossenschaftsbanken (§ 1 GenG) und die damit einhergehenden besonderen Governance-Strukturen sind nach Ansicht der Autoren die wesentliche Begründung für diese Erkenntnis. Kapitel 4 widmet sich den Governance-Strukturen von Genossenschaftsbanken. Speziell wird in diesem Kapitel die Forschungsfrage behandelt, ob Finanzexperten im Aufsichtsrat von Genossenschaftsbanken zu einer prozyklischen Bankperformance führen. Dieser Zusammenhang wurde in der Studie von Minton, Taillard und Williamson (2014) bei kapitalmarktorientierten Banken aufgezeigt. Die Ergebnisse der Genossenschaftsbanken hingegen zeigen, dass Finanzexperten in den Aufsichtsräten von Genossenschaftsbanken im Zeitraum von 2006 bis 2011 keine prozyklische Bankperformance erzeugen. Im Gegenteil, die Ergebnisse weisen darauf hin, dass Finanzexperten in den Aufsichtsräten von Genossenschaftsbanken eine langfristige Stabilität der Banken gewährleisten. In der Konsequenz bedeutet das, dass Regulatoren die Eigentümerstrukturen (und damit das Geschäftsmodell) von Banken berücksichtigen sollten, wenn sie neue regulatorische Anforderungen hinsichtlich Finanzexperten in den Aufsichtsräten von Banken einführen.

The short-lived popularity boost of the Osama bin Laden operation having all but faded, President Obama for the first time appears vulnerable and could be defeated in the 2012 election. Indeed, many are starting to wonder if he will be a one-term president like Jimmy Carter and George H.W. Bush. As congressional leaders continue to meet with Vice President Joe Biden to negotiate a reduction of the federal budget and to avoid a potential default on government debt, the economic recovery seems to be stalling: reports released last week show unemployment rose again to 9.1 % and job growth slowed down, and manufacturing and retail sales are also down from last quarter.The only good news for the President is that the Republican field of candidates, while still fluid, is very weak so far, and the Republican Party leadership divided and ineffective. Hefty potential candidates such as Jeb Bush (undoubtedly the strongest intellect in the GOP today) and New Jersey Governor Chris Christie have eschewed confronting the formidable President-candidate in 2012 and seem to be lying in wait for 2016, when they expect the field to be wide open.The first serious national presidential debate for the Republican candidacy took place on Monday, June 13. Mitt Romney, former governor of Massachusetts and the author of a health plan there which critics contend is very similar to Obama's, emerged as the solid front-runner and Michelle Bachman, an Evangelical Congresswoman from Minnesota and a Tea Party favorite, as the one who can challenge him. She is a former tax lawyer and a mother of five, who also apparently has found time to raise 23 foster kids. She is often compared to Sarah Palin, but most agree that she has more substance, understands how the government and can articulate ideas. She portrays herself as the anti-establishment figure, although she has been in Congress for a while and is at present the Chair of the House Intelligence Committee. Similarly to Palin, she considers the federal government an "elitist conspiracy" against middle-America and has invoked the War Powers Resolution to force Obama to request Congress authorization to continue operations in Libya. Tim Pawlenty, former governor of Minnesota, also an Evangelical with Tea Party following, was expected to be a serious challenger, but missed an opportunity to confront Romney on his health care plan for Massachusetts, which he had severely criticized the day before on national TV, stating it was very similar to Obama's, and going as far as calling Romney a "co-conspirator in Obama care." This lack of courage to confront the front-runner personally has made him a distant third in the primary race. Romney, on the other hand, was very well-prepared, confident in his own image of the businessman/CEO who can fix the jobs problem. The rest of the Republican candidates were a motley crew, starting with Herman Cain, an African-American businessman, owner of a pizza chain and talk show host, followed by Ron Paul, a radical libertarian that in spite of his quirky ways is quite endearing in his candid contempt for government, and Newt Gingrich, whose entire campaign staff had just resigned due to his lack of discipline and inability to run a serious campaign. All candidates focused more on bashing Obama than each other, since it is early in the race and there will be time enough for that this coming fall. Rick Santorum, another fiscal and social conservative (but in this case Catholic) and former Senator for Pennsylvania, completes the second-tier line-up of Republican candidates.But the Republican field has not firmed up yet, and there could be some surprise Republican candidates entering the race, as the President appears more vulnerable. In fact, only yesterday John Huntsman, a new intriguing figure who has been Obama's ambassador to China, joined the fray announcing his candidacy from Liberty Island, next to the Statue of Liberty, in the same spot where Ronald Reagan announced his in 1980. Huntsman, former governor of Utah, is a billionaire, a moderate and a Mormon, just like Romney. Both will skip Iowa, the first test for candidates, and one dominated by Evangelical "value" voters. Both are well-spoken, good looking family men with no rough edges. Unlike Romney, he has very little name recognition at the national level, and spent years as a missionary in China, where he learnt to speak Mandarin fluently. What he brings to the race is his expertise in that country, the main holder of American's debt, and therefore, the one that worries Americans the most. He has framed this primary contest as one between "renewal and decline". He speaks in a very quiet, civil tone and he introduced himself to the public through a stream of unusual videos, one for example that shows the candidate himself, in motocross attire from heads to toe, riding his motorbike across the Utah desert, as dreamy country music plays in the background. The White House is said to be concerned about his candidacy, not only because of moderation, his capacity and his presidential demeanor but also because he has been an insider of this administration and may use information thus acquired against the President. He could become a formidable opponent, a Republican mirror image of the President.Another prospective candidate, who, if he decides to run, could throw all calculations into disarray, is Rick Perry, the Governor of Texas. He is an attractive candidate for the party establishment and has two very strong qualities: first, he is a social conservative who could supersede Bachman and Pawlenty in drawing the Tea Party vote; second, he has been a successful governor who can boast about his job creation record in Texas (40% of all new jobs during the recovery were created in Texas). He is still testing the waters, and similarly to Huntsman, may perhaps use 2012 as a platform that can propel him into the 2016 election. Although he has not announced his candidacy, observers point to his convening of a "National Day of Prayer" for early August as a sign that he may run. He would be a formidable contester, since he can speak both the language of the Tea Party as well as the national language of this 2012 election, which is the economy and jobs.In comparing the Republican Party today with the one of ten years ago, one cannot help but notice the big shift that has occurred, and in doing so, perhaps be less dismissive of Ron Paul's philosophical influence on the party rank and file. The truth is the libertarian streak has made important inroads inside the party, and voters are now serious about not only fiscal conservatism and smaller government, but also a retrenchment of America's role in the world. This was apparent during last week's debate and the public conversations that followed in the airwaves throughout the week. Most of the candidates blasted Obama for intervening in Libya and called for an early withdrawal from Afghanistan. Michelle Bachman invoked the War Powers Resolution, passed in 1973 during Watergate, which obligates the President to seek the approval of Congress 60 days after the beginning of hostilities. The Republican Party has traditionally been the home of National Security "hawks", and the last strong isolationist mood in the party dates to the 1920s. While an isolationist wing emerged again right before Gen. Eisenhower became president, after that it was represented by a very small group, led in the last twenty years or so by Pat Buchanan. Today, a war-weary and budget- conscious American public is in favor of withdrawal from Afghanistan by a wide majority (73% of all Americans, 59% among Republicans), in spite of the fact that most had understood that to be a "war of necessity" as opposed to Iraq, a war of choice. If we count American military presence in Iraq, Libya, Yemen and the tribal areas of Pakistan, today the US is involved in five different conflicts, and spending billions of dollars a month on them, most of which are considered wars of choice. Today, President Obama is in fact a victim of his own success: bin Laden is dead, so Americans want out of Afghanistan. This is echoed loudly enough by his opponents. The President is thus under pressure to bring the troops home not only by libertarians but also by extreme Right candidates (Bachman) and even by mainstream candidates like Huntsman and Romney.After the debate, Republican Senators John Mc Cain and Lindsay Graham and Defense Secretary Gates took to the airwaves to admonish the candidates on this issue, accusing them of choosing politics over policy in matters of national security. Mc Cain went so far as to say that Reagan would not recognize his own party: "This is not the Republican Party of Ronald Reagan, who was always willing to stand up for freedom all over the world". He insisted that Khadafy was crumbling and that US logistical support, intelligence and refueling capabilities had to be continued to finish him off. He went even further and picked the opportunity to criticize Obama for not using America's own airpower, and instead "leading from behind". This was a theme that Bachman had also used in her speech, somewhat incoherently, since she vilified Obama for allowing the French to lead the operation in Libya while at the same time invoking the War Powers Resolution and demanding US withdrawal, since there were no apparent US interests involved there. Mc Cain in his own interview with Christiane Amanpour, later refuted Bachman's claim by stating that Khadafi had consistently supported terrorism, was responsible for the bombing of Pan Am 103 and was about to massacre his own people at Benghazi when NATO intervened and stopped him. "Our interests are our values" and "Sometimes leadership entails sacrifice," he added.To Romney's equivocal reference to the "Afghanis (sic) war of Independence" (an expression that per se brings serious doubts to his basic knowledge of geopolitics) Senator Lindsay Graham also in his own interview, later retorted: "This is not a war of Afghan independence, from my point of view" (of course, it isn't, it's a civil war!). He continued: "This is the center of gravity against the war on terror, radical Islam. It is in our national security interest to make sure that the Taliban never come back". He warned them not to try to position themselves to "the Left" of President Obama on this issue" and he hinted that that decision would lose them the nomination.Among the wide array of opinions, only Tim Pawlenty heeded the party line that the advice of military commanders and the situation on the ground would be the main determinant of troop withdrawals under his watch. Outgoing Defense Secretary Robert Gates criticized the "declinists" who put the short term expediency politics ahead of long-term national security interests. He added that examining the bottom line only is short-sighted, since intervention is not about sheer cost, it is about the cost of failure of early withdrawals, such as Afghanistan in 1989. Earlier, on his last trip as defense secretary, Gates had bluntly told NATO members meeting in Brussels that the military weakness of most members and their lack of will to share risks and costs of NATO operations were putting severe strains on the organization and particularly on the United States. Indeed, less than a third of NATO members are taking part in the Libyan operation, although NATO is a consensus- based organization and therefore, all members voted to approve it.According Secretary Gates, the need to cut spending and radically reduce the budget has become an obsession and sparked a new current of isolationism that now insidiously divides the traditionally hawkish Republican Party. This, he told a Newsweek interviewer, is one of the main reasons that have led to his resignation, after serving two administrations and becoming the epitome of bipartisanship. His unwillingness to plan for more withdrawals and find other ways to reduce the bloated defense budget has been criticized both from the Left and the Right. He complains about how both "Congress budget hawks and defense hawks" constantly interfere with his work. He ends by saying he refuses to be part of a nation that is forced to scale back its military power so much that it can no longer lead. His frustration is apparent; his resignation paved the way for Obama's announcement of troop withdrawal, a few days later.This last week, the presidential politics of war became clearer. Feeling the pressure of Republicans attacking him from his "left flank", President Obama told a war-weary nation that he plans to start withdrawing troops by December this year, ending the surge by the summer of 2012 and bringing home most of the rest by 2014. Although there is a widespread sense that Obama has gotten so involved in the daily details of the war that would prefer to stay on and see his counterinsurgency policy through, he has quickly readjusted to the realities at home and accelerated the withdrawal timeline that his generals had recommended. With his earlier decisions of aggressively pursuing the war on terror, signing off on drone killing missions, and having bin Laden killed inside Pakistan, he successfully beat the image of a Dovish President, weak in National Security. This past Wednesday, with the words, "It is time to do nation-building at home", he acknowledged the public's concerns about the waste of American power, blood and treasure abroad while the country is still suffering from the recession, and quickly moved back to center.This is the spirit of the times. It requires a new type of leadership, one that is strong enough to face down enemies, yet flexible enough to accommodate to the new and constantly shifting realities, to accept a revised status of the nation and to lead it into new era in its history. Time will show whether such leader is among the Republicans new line-up or whether he is already in the White House.Senior Lecturer, Department of Political Science and Geography Director, ODU Model United Nations Program Old Dominion University, Norfolk, Virginia

The papers in the present SUERF Study is a selection of the papers presented at a SUERF Workshop and Special OeNB East Jour Fixe held at Oesterreichische Nationalbank in Vienna on 23 January 2009. In his opening remarks (chapter 2), Ewald Nowotny, Governor of the Oesterreichische Nationalbank referred to Austrian banks? engagement with neighbouring Central and Eastern European Countries. The current crisis should not make people forget the fact that Austrian banks? deep engagement with the neighbouring countries is one of the success stories in Austrian economic history. Since the fall of the Berlin Wall, Austrian banks have become one of the driving forces of the process of structural adjustment, modernization of business practices, and deepening of financial intermediation in the region. At end 2007, in Central Europe, the share of Austrian banks surpassed a fifth of aggregate sector assets, in Southeastern Europe even a third of the respective total. A considerable share of the earnings of Austrian banks comes from banking activities in Central and Eastern Europe. Austrian bankers can claim to be among the pioneer foreign investors in Russia, Ukraine, Kazakstan and Belarus. The international financial crisis has from September 2008 demonstrated Russia?s structural vulnerability. The comprehensive countermeasures by the Russian authorities to assist the banking sector and the economy are characterized by the Governor as worthy endeavours. Chapter 3 is based on the keynote speech by Pekka Sutela, BOFIT, Bank of Finland ?Russian Finance: Drag or Booster for Future Growth?? The author praises the Russian authorities for having made prudent decisions in recent years. The Putin-Kudrin regime chose a stability-oriented macro policy. The very strong increase in the global oil price up to 2008 implied a strong growth in the value of Russian exports and lead to an impressive GDP growth. The author uses the term ?windfall?. The Russian Government decided to pay back practically all foreign debt, much of it ahead of schedule. The regime wanted to bring back what they see as Russian sovereignty and in particular to avoid being dependent on IMF or other foreign financiers. Their policy contributed strongly to an improvement of Russia?s general credit-worthiness and to a growth in foreign reserves. During the 1990s, lack of trust in the rouble had as consequence that the US dollar was applied to a considerable extent in payments between Russians. The stability oriented policy after 2001 contributed to a de-dollarization of the economy up to 2008. It follows from the stability-oriented policy that Russia was relatively well prepared when it was hit by the global financial crisis in 2007?2008. In the autumn of 2008, however, the general public started to withdraw bank deposits and the relative share of foreign exchange deposits increased again. The public shifted towards foreign currency cash assets. The author explains that Russia has a dual economy. The natural resource based sectors are clearly globally competitive but the sectors outside the resource sectors are not. The big resource based companies have relied on foreign markets for their financial needs. The home market is primarily serviced by domestic banks. At the end of September 2008, government-controlled banks had 47.8% of all bank assets. The state maintains banking sector stability primarily through state banks. The author?s answer to the question in the headline is: ?The Russian financial system is rather a drag than a booster for future growth?. In addition, it is unlikely that Russia will become a regional financial centre or an inventionbased society in the foreseeable future. Chapter 4 by Stephan Barisitz, Oesterreichische Nationalbank, is ?Russian Banking in Recent Years: Gaining Depth in a Fragile Environment.? The author shows tables with macroeconomic, monetary and financial indicators for Russia for the years 2002?2008. Key observations are: Strong economic growth, strong dependence on oil prices, inflation problems, recent volatility of private capital in- and outflows. Banking development initially featured rather slow recovery from the financial crisis of 1998, coupled with sluggish reforms. This was followed by a stepped-up pace of institutional and structural adjustments in 2003?2005, which brought about major improvements of banking activities and of the regulatory framework. The return on equity (ROE) of banks was in 2006?2007 above 20%. The solvency ratio of banks declined steadily up to 2008 due to strong growth in bank assets. The oil price driven improvements in Russia?s terms of trade over the period 1998 to 2008 combined with political stability, prudent macroeconomic policies and some successful institutional and structural reforms have supported Russian economic expansion. Not only exports, but also consumption, have driven strong GDP growth. Financial intermediation continued to deepen swiftly in Russia up to the fall of 2008, despite important repercussions of the US subprime crisis. As the interbank market tightened during 2008 and capital outflows increased, Central Bank of Russia reacted quickly with repeated liquidity interventions. Following the continuous oil price decline and pressures on the rouble, Central Bank of Russia intervened extensively in the foreign exchange market and draw down foreign exchange reserves. The controlled depreciation strategy initiated in November 20078 has not stopped the decline in foreign exchange reserves. Due to the still sizable foreign reserves, the relatively high profitability of banking activity and the satisfactory capital adequacy level as shock absorbing factors, Russia seems to be in a better position to handle the financial crisis than many other countries. Chapter 5 by Alexander Lehmann, European Bank for Reconstruction and Development has the headline ?Banks and Financial Reform: Their Role in Sustaining Russia?s Growth.? The paper focuses on the strength of the link between economic growth and financial development. Even in East European transition countries where a positive correlation between finance and growth developed in the 1990s, there was little microeconomic evidence that the financial sector actively supported growth. Investments were overwhelmingly financed through retained earnings, and what little external finance was raised came from foreign direct investment. Around year 2000, this changed. Regulatory improvements, better enforcement and rapid development of individual institutions meant that the financial sector undoubtedly has supported economic growth since year 2000. The disruption to credit growth since 2008 and the simultaneous downturn of the Russian real economy has made the link abundantly clear. EBRD evaluates the progress in structural reforms in transition countries by means of ?transition scores?. The author shows an exhibit which illustrates the development of the EBRD transition score for Russia from 1989 to 2006. It shows that the fastest progress took place from 1995 to 2003. The improvements in the regulatory framework for banking activity supported financial intermediation and Russian banks expanded their balance sheets and diversified into lending to retail customers and SMEs. For corporate investment as a whole, however, the share of new investment financed through bank credit remained relatively small. The sectors that saw sharp increases in investment and accounted for the bulk of capital spending, predominantly benefited from internal cash flows, or benefited from public support or ownership. Chapter 6 by Cyril Pineau-Valencienne, CEO, CPV Conseil, is ?Russian financial institutions and the oil and gas sector: funding and recycling.? The paper first outlines the importance of the oil and gas sector for the Russian economy. Capital expenditures in the sector grew strongly from 1999 to 2007. The huge investments were to a large extent financed by internal operating cash flows and by borrowing in international financial markets. The big oil and gas companies are important customers for foreign banks. The companies also have their own so-called raw material banks but these banks have not played a major role as related parties in the financing of the investments of these groups. The willingness of the oil and gas companies to incur debt denominated in foreign currency must be understood in the light of their revenue structure. Contracts in the global energy markets are primarily denominated in US-dollars and the companies are therefore to a considerable extent able to match currency revenues from exports with currency payments of principal and interest. Recycling of funds related to the oil and gas sector has partly been carried out by the state and by the sovereign funds controlled by the state. Revenue from export duties has been accumulated in the funds and applied in accordance with the funds? investment strategies. Chapter 7 is based on the presentation by Zuzana Fungácová, BOFIT, Bank of Finland ?Risk-taking by Russian banks: do location, ownership and size matter?? The paper is co-authored by Laura Solanko. The rapid growth of the assets of Russian banks has in the last 6?7 years contributed to a decrease in the capital adequacy ratio, thus influencing the ability of banks to cope with risk. In the paper, the authors investigate the relationship between bank characteristics and risk-taking. The banks are divided into different subgroups by size, ownership and location. The authors distinguish between state-controlled, foreign-controlled and domestic private banks. Risk is measured in two different ways: By group-wise comparisons of financial risk ratios i.e. accounting data, and by regression analysis of bank insolvency risk as measured by a Z-score indicator. The average level of financial ratios are all well above the regulatory minima set by Central Bank of Russia. Large banks in Russia have higher insolvency risk than small ones. Foreign-owned banks exhibit higher insolvency risk than domestic banks. State-controlled banks are on average more stable than the private domestic banks. Similar to the case of foreign banks, large state-controlled banks are more stable than the others. Regional banks are significantly more prone to risk-taking than their counterparts in Moscow. Chapter 8 is based on the keynote speech ?Russia?s Financial Crisis: Causes, Consequences, and Prospects? by Zeljko Bogetic, World Bank, Moscow. Until mid-2008, Russia was viewed as a ?safe haven? during turbulent times in global financial markets. Record high oil prices, strong macroeconomic fundamentals, lack of exposure of Russian banks to the US sub-prime mortgage markets, strong ratings and a strong appreciating currency explained the confidence in Russia. After mid-2008 Russia was hit. There was an oil price shock, a sudden stop in capital flows, and a sharp tightening of external borrowing conditions. The paper contains a diagram that documents an almost perfect correlation of the Russian stock index RTS with the price of oil. From the peaks in May-June 2008 to the end of the year, the RTS moved from 2400 to 440 and the oil price from USD 144 per barrel to USD 45 per barrel. The non-oil external current account deficit continued to deteriorate very fast in 2008 as import volumes grew faster than non-oil exports. Incoming FDIs declined and worsened the composition of capital flows towards borrowing. While public external debt remained moderate, private (corporate and bank) debt grew rapidly. In the balance sheets of Russian banks, the loan-deposit ratio increased from approximately 107% in 2005 to 127% in the autumn of 2008, making the banking sector more exposed to the interbank market and to rollover risk. As response to the crisis, the Russian authorities have loosened their monetary stance and provided fiscal support to ease the liquidity crisis. The exchange rate has continuously been managed with progressive widening of the bi-currency corridor. After a gradual depreciation since November 2008, the rouble was devalued in mid January 2009. The speaker described the 2009 outlook for the Russian economy as very uncertain. It is likely that the twin surpluses on the Government budget and the balance of payments current account will disappear, but thanks to the prudent macroeconomic policies in recent years, these deficits can be financed for some time. The speaker reflected on the social impact of the crisis. If the recession in 2009 becomes deeper, it might require an introduction of a fiscal stimulus package focusing on domestic demand and the poorer segments of the population, including strengthening of the unemployment, training and social assistance and possibly well designed public works. Chapter 9 is based on the presentation by Peter Havlik, The Vienna Institute for International Economic Studies (WIIW) ?Russian Economy and the Global Turmoil.? The paper contains very illustrative exhibits that show the development of Russian GDP, exports, imports, inflation, money supply, stock prices and nominal and real exchange rates. Among the Putin administration?s key achievements, he lists improved living standards, rising employment, more FDI inflows, repayment of external debt, ballooning foreign exchange reserves, restoring stability, stronger role of the state but also deteriorating external relations. Despite strong economic fundamentals, Russia has been seriously hit by the global crisis. The Medvedev administration faces serious challenges. It plans to use industrial policy instruments in order to reduce the dependence on energy proceeds. The Government offers targeted support to various public-private partnership projects in the automotive, aviation, shipbuilding and selected high-tech industries. According to the speaker, some of the envisaged industrial policy tools could well be in conflict with WTO rules and make Russia?s WTO accession more difficult. Chapter 10 is based on the workshop contribution by Debora Revoltella, UniCredit Group ?The Russian Banking Sector: What to Expect? The paper is co-authored by Vladimir V.Osakovsky and Valery Invushin. It is divided in three sections: 1) The past: Russian economic renaissance, 2) The crisis: Politics and Economics join forces, and 3) Longer term prospects are brighter. Up to 2008, Russia enjoyed strong growth in domestic investment, consumption and GDP. Prudent fiscal policy and massive capital inflows helped to amass the world?s third largest international reserves. The country was, however, exposed to global commodities prices, a demographic crisis, a rigid labour market and an increasing dependence on foreign sources of funding. The crisis in 2008 was triggered by collapse of global commodities prices, massive capital flight, failures of some large market participants and general loss of confidence abroad and at home. As reaction to the challenges posed by the crisis, the Government and Central bank of Russia initiated corporate debt refinancing assistance, liquidity infusion into the banking system and fiscal stimuli. The authors expect a major restructuring of the Russian banking sector including a considerable reduction of the number of financial institutions.

This Technical Note was prepared in the context of a joint World Bank-IMF Financial Sector Assessment Program mission in Bosnia and Herzegovina during October-November 2014. Financial inclusion in Bosnia and Herzegovina performs relatively well compared to peers, but gaps remain for selected market segments. Financial sector development and access to finance for firms is constrained by weak domestic demand, high collateral requirements and inadequate credit enforcement mechanisms.

Tajikistan has successfully emerged from the global economic crisis. Economic activity was strong, driven by growth in industrial production and services. Inward remittances remain a key factor in stimulating domestic consumption. Although inflation returned to single digits, it continues to be susceptible to higher global prices of key imports. The country remains vulnerable to a range of external shocks, and economic outcomes depend critically on regional trade, transport, and investment policies. Concerns remain with respect to weaknesses in the financial sector. Structural reforms continue, and transparency has increased. The outlook is generally positive, but chronic risks remain.

Afghanistan will experience a major security and development transition over the next three years. At the Kabul and Lisbon Conferences in 2010, NATO and the Afghan government agreed that full responsibility for security would be handed over to the Afghan National Security Forces (ANSF) by the end of 2014. Development progress since 2001 has been mixed. Some major achievements have been recorded, such as rapid economic growth (with large fluctuations), relatively low inflation (after hyperinflation in the 1990s), better public financial management, and gains in basic health and education. Key social indicators, including life expectancy and maternal mortality, have improved markedly (admittedly from an extremely low base), and women are participating more in the economy. Yet in other respects, particularly governance and institution building, the country has fared less well, and many indicators have worsened in recent years. Afghanistan remains one of the world's least developed countries, with a per capita gross domestic product (GDP) of only $528 in 2010/11. More than a third of the population live below the poverty line, more than half are vulnerable and at serious risk of falling into poverty, and three?quarters are illiterate. This report is intended to be comprehensive, so it also discusses the broader historical and political economy context of development in the country, and how Afghanistan compares with other countries that have undergone their own transitions over the past 30 years. This report is based on data collected from various sources in 2011, and its analysis and findings therefore comprise the team's considered assessment using the best available information available by the end of that year. In addition, projections of future trends in Afghanistan inevitably are subject to uncertainty and reflect any weaknesses in the underlying data. Thus the report's projections should be seen as subject to further adjustments and improvements as better and more recent information become available. This report is presented in two volumes. Volume one is a stand?alone Overview which highlights the main findings, projections, and recommendations of the study. Volume two consists of five chapters presenting the detailed empirical background, analytical findings, projections, and recommendations of the study, along with a concluding chapter and three technical appendices.

Developing countries have responded to the multiple shocks from the food, fuel and finance crises of 2008-2009 with a mix of responses aimed at both mitigating the immediate impacts of the crises on households (and particularly children), and protecting future investments in human capital. While some countries have introduced new safety net programs, others have modified and/or expanded existing ones. Since many countries have introduced conditional cash transfers (CCTs) in recent years, these programs have been used as an important starting point for a response. This paper aims to describe how conditional cash transfers have been used by different countries to respond to the crises (e.g. by expanding coverage and/or increasing benefit amounts), distill lessons about their effectiveness as crisis-response programs, identify design features that can facilitate their ability to respond to transient poverty shocks, and assess how they can complement other safety net programs.

Recent academic research has questioned the role of economic policy as a determinant of long term growth rates. While there seems to be a correlation between several policy variables and growth rates, this correlation disappears when controlling for other factors. As an example, the significance of key economic policy variables such as inflation or government size disappears if we account for the quality of institutions. This paper looks at recent empirical research that questions the conclusion that macroeconomic policy does not matter for growth. By looking at the volatility of economic policy (whether it is fiscal policy or exchange rates), the authors find that policy is still a relevant and robust explanatory variable of cross country differences in economic growth. These results have strong policy implications. Improvements in the conduct of macroeconomic policy can have beneficial growth effects even if institutional reforms are not taking place. These results do not deny the importance of institutional reforms. By setting the right institutions one can ensure the proper conduct of macroeconomic policy without having to rely on the 'quality' of the decision maker.

Recent academic research has questioned the role of economic policy as a determinant of long term growth rates. While there seems to be a correlation between several policy variables and growth rates, this correlation disappears when controlling for other factors. As an example, the significance of key economic policy variables such as inflation or government size disappears if we account for the quality of institutions. This paper looks at recent empirical research that questions the conclusion that macroeconomic policy does not matter for growth. By looking at the volatility of economic policy (whether it is fiscal policy or exchange rates), the authors find that policy is still a relevant and robust explanatory variable of cross country differences in economic growth. These results have strong policy implications. Improvements in the conduct of macroeconomic policy can have beneficial growth effects even if institutional reforms are not taking place. These results do not deny the importance of institutional reforms. By setting the right institutions one can ensure the proper conduct of macroeconomic policy without having to rely on the 'quality' of the decision maker.

Norbert Michel and Jai Kedia


A few weeks ago, American Compass released Rebuilding American Capitalism, A Handbook for Conservative Policymakers. This Forbes column (American Compass Points To Myths Not Facts) provided a very brief critique of the handbook's "Financialization" chapter, and Oren Cass, American Compass's Executive Director, released a response titled Yes, Financialization Is Real.
This Cato at Liberty post is the fourth in a series that expands on the original criticisms outlined in the Forbes column. (The first three in the series are available here, here, and here.) This post demonstrates the evidence does not support American Compass's claims regarding investment. It also further documents American Compass's failure to clearly specify terms and dates, as well as its selective use of examples that appear to support its positions.
To recap, the American Compass handbook states the following:
American finance has metastasized, claiming a disproportionate share of the nation's top business talent and the economy's profits, even as actual investment has declined." [Emphasis added.]

As with profits, the "Financialization" chapter does not specify a single preferred measure of investment or any time frame for analysis. It simply complains that "In recent decades…actual investment has declined." [Emphasis added.] The original critique stated, "The claim that investment has declined is also easily verified as false," and then used National Income and Product Account (NIPA) data to show "investment in fixed assets has been steadily increasing since 1970, a trend that holds even if the data is adjusted for inflation."
Cass takes issue with the original critique's use of absolute investment dollars rather than investment as a share of GDP. Cass's response states:
Of course, investment rises in absolute dollars as the American population grows and economy expands. Who would claim otherwise? The question is what has happened relative to GDP.

Yet, American Compass uses the term actual investment in the introduction to the "Financialization" chapter and purposely uses aggregate data in levels when doing so suits its purpose. But importantly, American Compass fails to settle on any definition of investment.
Here's a list of direct quotes describing investment from the "Financialization" chapter:
Unfortunately, in the United States, productive business investment has been in long‐​term decline and the financial industry now specializes in trading assets around in circles. [Emphasis added, no dates given.]
Economy‐​wide, business investment has fallen significantly as a share of GDP. [Emphasis added, no dates given.]
They instead become savers themselves by acquiring financial assets, effectively deferring the earthy and material work of productive capital investment to others. [Emphasis added, no dates given.]
Statistically, this transition began in the 1980s, as the share of corporate investment in tangible assets declined and the acquisition of financial assets climbed. [Emphasis added.]
Despite this ambiguity, Cass's response insists that readers should know exactly what investment data American Compass's handbook is referring to because "the Rebuilding American Capitalism handbook is a synthesis of our analysis and recommendations and provides copious references to further reading alongside each proposal." So, here's a list of direct quotes from two other American Compass reports, none of which provide a clear answer:
Actual‐​investment, by which I mean the allocation of capital toward the development of new productive capacity—the building of structures, the installment of machines, the creation of intellectual property—has been weakening in America for decades now. [Found in "The Rise of Wall Street and the Fall of American Investment" – emphasis added.]
As non‐​investors have overrun the banks and markets and taken control of corporations, actual‐​investment has slowed. The nation's capital base is smaller by literally trillions of dollars as a result, representing untold enterprises never built, innovations never pursued, and workers never given opportunity. [Found in "The Rise of Wall Street and the Fall of American Investment" – emphasis added.]
Net non‐​residential fixed investment as a share of GDP has fallen by almost half, from 4.1% in the 1970s and 80s to 2.5% in the 2010s. [Found in "The Rise of Wall Street and the Fall of American Investment" – emphasis added.]
The classic categories of investment, structures and equipment, account for 87% of the nation's capital base and the rate of investment there has been declining in both gross and net terms. [Found in "The Rise of Wall Street and the Fall of American Investment" – emphasis added.]
Net investment as a share of value‐​add averaged 4.3% during 1998–2000 and then 0.5% during 2002-04. During 2000–17, the average was 2.2%, leading to a $1.0 trillion shortfall over the period, relative to the 1970–99 rate. [Found in "The Rise of Wall Street and the Fall of American Investment" – emphasis added.]
As we have seen, the cumulative gross investment shortfall during 2009–17 as compared to 1970–99 amounted to $3.4 trillion. [Found in "The Rise of Wall Street and the Fall of American Investment" – emphasis added.]
Nationwide, net investment as a share of GDP has fallen sharply, and the shortfall since the Great Recession totals roughly $3 trillion (equivalent to the excess outflow from public companies). [Found in "Confronting Coin‐​Flip Capitalism" – emphasis added.]
This creates a vicious cycle in which business leaders pursuing promising opportunities become harder to find, further encouraging the financial sector to develop strategies for deriving profits disconnected from actual investment. [Found in "Confronting Coin‐​Flip Capitalism" – emphasis added.]
From 2009 to 2017, the nation needed $22.9 trillion in gross investment to match the average growth rate of the capital stock during 1970–99 (3.8% of GDP annually). Instead, investment totaled only $19.6 trillion. [Found in "Confronting Coin‐​Flip Capitalism" – emphasis added.]
Even the market fundamentalists—indeed, especially the market fundamentalists—recognize that higher investment levels would be beneficial. [Found in "Confronting Coin‐​Flip Capitalism" – emphasis added.]
Setting aside American Compass's failure to explain whether any of these versions of investment is its single preferred measure of investment to study "financialization," it is true that there are many ways to describe investment. Indeed, there are even many different time periods, inflation adjustments, aggregation issues, and sub‐​components of investment that influence how an aggregate investment series behaves.
Moreover, if investment (however defined) declines, or declines slower than some metric, that fact alone would not be evidence that investment is less than optimal. While many American Compass reports imply investment is suboptimal, American Compass has not provided evidence that investment is less than what it should be.
Take, for instance, American Compass's claim that "Net non‐​residential fixed investment as a share of GDP has fallen by almost half, from 4.1 percent in the 1970s and 80s to 2.5 percent in the 2010s." If American Compass believes that that 4.1 percent was the optimal share in 1970, and a 1.6 percentage point lower share in the 2010s "threatens our future prosperity" and requires America to rebuild capitalism, then the least it can do is state a clear hypothesis and make an empirical case. Such critics cannot simply argue that a lower number is less than optimal. (For what it's worth, American Compass's "The Corporate Erosion of Capitalism" also fails to provide such evidence – it is merely an accounting exercise without any economic analysis of the optimal levels of real investment individual firms need to sustain their own operations.)
It turns out, though, that the long‐​term trend in most of these investment measures is not decreasing. The only way to show that "investment" has declined is to selectively define the measure and period for analysis. Otherwise, it is impossible to say that investment has declined.
Regardless, there is no inherent economic reason that investment, whether in absolute amounts or relative to GDP, whether net or gross, or real or nominal, must constantly increase. A developed economy with evolving working patterns, for instance, would not need to constantly invest more in new corporate structures.
Similarly, the rate of growth of investment does not have to constantly match or exceed GDP (or profit) growth in any historical period. The mere fact that some metric of investment grows slower than some other economic measure – even for an extended period – does not indicate that the economy will be harmed much less that "financialization" caused the "slow" growth.
Our analysis now turns to the actual time series of real investment and real GDP, respectively (see Figure 1 and Figure 2). Contrary to what Cass claims in his response, the right question is not always "what has happened [to investment] relative to GDP." (Even if it was the correct question, simply dividing investment by GDP would not adequately account for confounding factors such as population growth, the cost of investment, productivity, feedback loops, etc.) Bluntly, it is not at all clear that using a relative measure is the "right" way to look at investment.









Figure 1: Real Gross Private Investment in the U.S., Annual from 1929 to 2022









Figure 2: Real Gross Domestic Product in the U.S., Annual from 1929 to 2022
For starters, nobody invests in amounts relative to GDP, and even American Compass often refers to levels of investment. Regardless, there are some basic mathematical issues that suggest, at the very least, researchers must be very careful drawing inferences from relative investment measures.
As Figure 1 and Figure 2 show, real (gross private domestic) investment and real GDP both display a sharp upward trend. However, the two series exhibit an enormous difference in size and volatility – the standard deviation of investment growth is five times greater than for GDP growth. A 20 percent year‐​to‐​year decline in investment is normal, but it would be highly unusual for GDP. Moreover, any decline in the ratio can easily mask the causal relationship between investment and economic growth.
Put differently, GDP is stable but one of its components – investment – fluctuates rapidly. This stability arises as investment accounts for only 13 percent of GDP on average and fluctuations in investment can be offset by counter‐​cyclical fluctuations in other components of GDP, such as consumption or fiscal spending. Consequently, measuring investment relative to GDP can give the appearance that something dreadful has happened even though such deviations may be the result of a perfectly normal economy, even one with optimal decision making.
Investment's high volatility is a commonly known macroeconomic fact. Benchmark macro models dating back to the start of macroeconomic modeling itself have highlighted investment's significant volatility in comparison to the rest of the economy. Successes of models since then are measured (at least in part) by whether their simulated time series can match the observed volatility of macro indicators such as investment.
Leaving the appropriateness of using levels aside, we now examine nominal investment relative to nominal GDP (i.e., the investment‐​to‐​GDP ratio), as well as several of its component measures. (See Figure 3.) These nominal metrics are available from 1929, but in fairness to American Compass, we only present the data from 1950 onwards. The series exhibits high volatility between 1929 and 1950 and starting the graph in 1929 biases the data toward a steeper increasing trend for investment and its component measures. (Incidentally, replicating Figure 3 with real investment and GDP figures also shows the ratio exhibiting an increasing trend.[1])
As Figure 3 shows, the investment‐​to‐​GDP ratio exhibits variation around a very mildly increasing trend for all of modern U.S. economic history. As for component measures, non‐​residential investment has grown significantly as a share of the economy, offsetting the decline in the share of residential investment. Finally, net private domestic investment has declined over time. From this set of investment measures, focusing only on net private domestic investment to argue "actual investment" has declined equates to selectively using a sub‐​component of investment while ignoring others.









Figure 3: Investment Metrics as Share of NGDP in the U.S., Annual from 1950 to 2022
Of course, there are still many other ways to describe investment. Assume, for example, that net nonresidential (or business) investment is the "right" measure to analyze, as Cass's response suggests. Figure 4 presents real net business investment and its subcomponents from 1967 to 2021.[2] It shows that net business investment exhibits a sharp increasing trend. (Figure 3 showed that nonresidential investment as a share of GDP exhibits an increasing trend.) While the trends are not as steep for the subcomponents, Figure 4 shows that net investment in business equipment and intellectual property also display increasing trends. However, net business investment in structures exhibits a decreasing trend. (Interestingly, in The Rise of Wall Street and the Fall of American Investment, American Compass groups structures and equipment together to demonstrate that investment in "Structures & Equipment" is declining.)









Figure 4: Real Net Nonresidential Investment and its Components in the U.S., Annual from 1967 to 2022
Obviously, it would make little sense to argue that "actual investment" is declining by focusing only on the decline in the net structure subcomponent, or any other component of investment for a shorter period. Put bluntly, American Compass is incorrect to use declines in any of these subcomponents to argue that there is some kind of broad decline in investment.
Still, the trends in these subcomponents on Figure 4 are even more problematic for American Compass. Not only do the trends contradict that investment is in a general decline, but American Compass's story requires an explanation for: (1) why the highly developed U.S. economy needs constantly increasing growth in structures; and, (2) how "financialization" is responsible for a decline in structure investment and a simultaneous increase in equipment and IP investment.
It is also worth noting that while there's nothing inherently wrong with using net investment figures, as American Compass sometimes does, neither the Bureau of Economic Analysis's depreciation estimates nor accounting depreciation perfectly coincide with economic depreciation. In other words, even when someone fully depreciates a piece of equipment for tax or accounting purposes, it does not mean that the equipment is no longer useful and must be immediately replaced.
More generally, from a macroeconomic perspective, there is no reason to distinguish between different sub‐​components of investment. The primary macro indicator of economic health is real GDP growth away from trend (or similar metrics such as output gap and unemployment). Investment is a means of facilitating capital accumulation and it is not immediately clear why one component of it is necessarily better than any other. This is why seminal empirical economic papers always focus on investment as an aggregate. Even highly cited papers that explicitly model net investment don't bother to include it in their results, instead focusing again on aggregate investment.
Overall, aggregate investment in the United States is not in decline. Yet, American Compass relies on a wide array of investment descriptions, in various time periods, to argue that American investment is in a general decline and below optimal levels. American Compass's error is only compounded by its imprecise definition of financialization. This combination of errors leaves American Compass with little more than a set of stories that appear to provide evidence financial markets threaten American capitalism.
In the next post, we will conclude this series by discussing American Compass's flawed characterization of Americans' income.


[1] It may seem unintuitive that shares would be different between nominal and real variables (prices on the numerator and denominator should cancel out), but the relative price of investment has changed significantly in comparison to overall GDP. Specifically, the deflator for investment has been significantly higher than for GDP, equalizing only since the 2010s.


[2] The BEA provides values for sub‐​components of investment that only go back to 1967.

The videos and speeches of the Bradley prize winners are up. My video here (Grumpy in a tux!), also the speech which I reproduce below. All the videos and speeches here (Betsy DeVos and Nina Shea) My previous interview with Rick Graeber, head of the Bradley foundation. Bradley also made a nice introduction video with photos from my childhood and early career. (A link here to the introduction video and speech together.) And to avoid us spending all our talks on thanking people, they had us write out a separate thanks. That seems not to be up yet, but I include mine below. I am very thankful, humbled to be included in such august company, and not so boorish that I would not have spent my whole talk without mentioning that, absent the separate opportunity to say so. Bradley prize remarks (i.e. condense three decades of policy writing into 10 minutes): Creeping stagnation ought to be recognized as the central economic issue of our time. Economic growth since 2000 has fallen almost by half compared with the last half of the 20th Century. The average American's income is already a quarter less than under the previous trend. If this trend continues, lost growth in fifty years will total three times today's economy. No economic issue — inflation, recession, trade, climate, income diversity — comes close to such numbers.Growth is not just more stuff, it's vastly better goods and services; it's health, environment, education, and culture; it's defense, social programs, and repaying government debt.Why are we stagnating? In my view, the answer is simple: America has the people, the ideas, and the investment capital to grow. We just can't get the permits. We are a great Gulliver, tied down by miles of Lilliputian red tape.  How much more can the US grow? Looking around the world, we see that even slightly better institutions produce large improvements in living standards. US taxes and regulations are only a bit less onerous than those in Canada and the UK, but US per capita income is 40% greater. Bigger improvements have enormous effects. US per capita income is 350% greater than Mexico's and 950% greater than India's. Unless you think the US is already perfect, there is a lot we can do. How can we improve the US economy? I offer four examples.I don't need to tell you how dysfunctional health care and insurance are. Just look at your latest absurd bill. There is no reason that health care cannot be provided in the same way as lawyering, accounting, architecture, construction, airplane travel, car repair, or any complex personal service. Let a brutally competitive market offer us better service at lower prices. There is no reason that health insurance cannot function at least as well as life, car, property, or other insurance. It's easy to address standard objections, such as preexisting conditions, asymmetric information, and so on.How did we get in this mess? There are two original sins. First, in order to get around wage controls during WWII, the government allowed a tax deduction for employer-based group plans, but not for portable insurance. Thus preexisting conditions were born: if you lose your job, you lose health insurance. Patch after patch then led to the current mess. Second, the government wants to provide health care to poor people, but without visibly taxing and spending a lot. So, the government forces hospitals to treat poor people below cost, and recoup the money by overcharging everyone else. But an overcharge cannot stand competition, so the government protects hospitals and insurers from competition. You'll know health care is competitive when, rather than hide prices, hospitals spam us with offers as airlines and cell phone companies do.  There is no reason why everyone's health care and insurance must be so screwed up to help the poor. A bit of taxing and spending instead — budgeted, appropriated, visible — would not stymie competition and innovation. Example 2: Banking offers plenty of room for improvement. In 1933, the US suffered a great bank run. Our government responded with deposit insurance. Guaranteeing deposits stops runs, but it's like sending your brother-in-law to Las Vegas with your credit card, what we economists call an "incentive for risk taking." The government piled on regulations to try to stop banks from taking risks. The banks got around the regulations, new crises erupted, new guarantees and regulations followed. This spring, the regulatory juggernaut failed to detect simple interest rate risk, and Silicon Valley Bank had a run, followed by others. The Fed and FDIC bailed out depositors and promised more rules. This system is fundamentally broken. The answer: Deposits should flow to accounts backed by reserves at the Fed, or short-term treasuries. Banks should get money for risky loans by issuing stock or long term debt that can't run. We can end private-sector financial crises forever, with next to no regulation. There is a lesson in these stories. If we want to improve regulations, we can't just bemoan them. We must understand how they emerged. As in health and banking, a regulatory mess often emerges from a continual patchwork, in which each step is a roughly sensible repair of the previous regulation's dysfunction. The little old lady swallowed a fly, a spider to catch the fly, and so on. Now horse is on the menu. Only a start-from-scratch reform will work.Much regulation protects politically influential businesses, workers, and other constituencies from the disruptions of growth. Responsive democracies give people what they want, good and hard. And in return, regulation extorts political support from those beneficiaries. We have to fix the regulatory structure, to give growth a seat at the table.  Economists are somewhat at fault too. They are taught to look at every problem, diagnose "market failure," and advocate new rules to be implemented by an omniscient, benevolent planner. But we do not live in a free market. When you see a problem, look first for the regulation that caused it.Example 3: Taxes are a mess, with high marginal rates that discourage work, investment and production; disappointing revenue; and massive, wasteful complexity. How can the government raise revenue while doing the least damage to the economy? A uniform consumption tax is the clear answer. Tax money when people spend it. When earnings are saved, invested, plowed into businesses that produce goods and services and employ people, leave them alone.Example 4: Bad incentives are again the unsung central problem of our social programs.  Roughly speaking, from zero to about sixty thousand dollars of income, if you earn an extra dollar, you lose a dollar of benefits. Fix the incentives, and more people will get ahead in life. We will also better help the truly needy, and the budget.Some more general points unite these stories:Focus on incentives. Politics and punditry are consumed with taking from A to give to B. Incentives are far more important for economic growth, and we can say something objective about them. Find the question. Politics and punditry usually advance answers without stating the question, or shop around for questions to justify the same old answers. Most people who disagree with the consumption tax really have different goals than funding the government with minimum economic damage. Well, what do you want the tax system to do? State the question, let's find the best answer to the question, and we can make a lot of progress.Look at the whole system. Tax disincentives come from the total difference between the value your additional work creates and what you can consume as a result. Between these lie payroll, income, excise, property, estate, sales, and corporate taxes, and more, at the federal, state, and local level. Greg Mankiw figured his all-in marginal tax rate at 90%, and even he left out sales, property, and a few more taxes. Social-program disincentives come from the combined phaseout of food stamps, housing subsidies, medicaid or Obamacare subsidies, disability payments, tax credits, and so on, down to low-income parking passes. And look at taxes and social programs together. A flat tax that finances checks to worthy people is very progressive government, if you want that. Looking at an individual tax or program for its disincentives or progressivity is silly. The list goes on. Horrible public education, labor laws, licensing laws, zoning, building and planning restrictions, immigration restrictions, regulatory barriers, endless lawsuits, prevailing-wage and domestic-content rules, are all sand in the productivity gears. Oh, and I haven't even gotten to money and inflation yet! And that just fixes our current economy. Long-term growth comes from new ideas. Many economists say we have run out of ideas; growth is ending; slice the pie. I look out the window and I see factory-built mini nuclear power plants that the Nuclear Regulatory Commission is strangling; I see a historic breakthrough in artificial intelligence, facing an outcry for the government to stop it. I see advances in biology that portend much better health and longevity, but good luck getting FDA approval or increasingly politicized research funding.Many conservatives disparage this "incentive economics" as outdated and boring. That attitude is utterly wrong. Incentives, and the freedom, rights, and rule of law that preserve incentives, remain the key to tremendous and widespread prosperity. And it is hard work to understand and fix the incentives behind today's problems.Yes, supply is less glamorous than stimulus. "Fix regulations" is a tougher slogan than "free money for voters." Efficiency requires detailed reform in every agency and market, the Marie-Kondo approach to our civic life. But it's possible. And we don't need to reform all the dinosaurs. As we have seen with telephones, airlines, and taxis, we just need to allow new competitors, to allow the buds of freedom to grow.Many people ask, "How can we get leaders to listen?" That's the wrong question. Believe in democracy, not bending the emperor's ear. Take action. My fellow prizewinners have grabbed the levers of influence that belong to citizens of our free society, and done hard work of reforming its institutions. And ideas matter. The Hoover Institution motto is "ideas defining a free society." The Bradley Foundation tonight celebrates good ideas, and is devoted to spreading them. When voters, media, the chattering classes, and institutions of civil society understand, advance and apply these ideas, politicians will swiftly follow.   Notes:Growth: Real GDP 1950:I was $2186 billion, and per capita $14500; in 2000:I, $12935 and per capita $45983; in 2022:IV, $20182 and per capita 60376. From these numbers, average log real GDP growth 1950-2000 was 3.56% From 2000-2002, 1.96%. In per capita terms,  2.31% and  1.20%. (2.31-1.20)x22 = 24.4. Cross-country comparison: Calculations based on purchasing-power-adjusted GDP per capita: US $69,287, Canada $52,790, UK $50,890, Mexico $19,587, India $7,242. Source: https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD The PPP adjustment tries to take account that some things are cheaper in other countries. Converting at the exchange rate produces even larger differences. US $70.248, Canada $51,987, UK $46,510, Mexico $10,065, India $2,256. Source: https://data.worldbank.org/indicator/NY.GDP.PCAP.CDMankiw: http://www.nytimes.com/2010/10/10/business/economy/10view.htmlThanksI have been fortunate to benefit from the effort, time, wisdom and affection of so many people, and many institutions that supported their efforts.Of course it starts with my parents, Eric and Lydia Cochrane. They expected children to think and speak at the family dinner table. They exposed me to different cultures, on the south side of Chicago and in Italy, sometimes beyond my desires. They set an example by how they lived: They steadfastly followed their intellectual pursuits with extreme honesty. They treated people with a radical egalitarianism. And then left me alone to pursue my own passions. I was lucky to learn from some extraordinary and dedicated teachers, at the Ancona Montessori School, the U of C Lab school, Italian public schools, and Kenwood high school. There, in an inner city public school, Arlene Gordon (Math), Judith Stein (English) Walter Sherrill (Chemistry) and especially Joel Hofslund (Physics) gave me absolutely first rate experience. Thanks also to Ed Shands' patient coaching of our swim team. I moved on to MIT to study physics. This was more impersonal, and a difficult time for me, but as it turned out a superb education in the kind of mathematical modeling essential to economics. I went on to study economics at the University of California at Berkeley. Faculty took PhD teaching seriously, not just of their own research, and I soaked it up. I thank especially my advisers, Roger Craine, Tom Rothermberg, and George Akerlof.  Many of their lessons are vivid today, but like my parents they provided only gentle guidance and feedback on my own imperfect quests. I was supremely luck to land a job at the University of Chicago. I learned a tremendous amount in the wide open collegial atmosphere at Chicago, thanks in large part to Lars Hansen and Gene Fama, but also colleagues too numerous to mention in this short space.  Generations of MBA and PhD students also pushed me hard to understand economics and became lifelong friends and colleagues. At just the right moment Hoover came calling, allowing me the time and institutional support to blossom as a public intellectual and commenter as well as an academic. A special thanks to John Raisin for that. No man is an island. The world of ideas is a conversation. Everything I know has been shaped by teachers, friends, colleagues, collaborators, students, journal editors, referees, and others who took the time and effort to help me think about things. Many small interactions have had a crucial effect on my life. A coffee conversation at a conference with John Campbell resulted in our best known academic paper. A lunch conversation with Luigi Zingales produced my first public writing during the financial crisis. As a result, Amity Shlaes invited me to a conference. Howard Dickman, then at the Wall Street Journal, liked my presentation and asked, "Why don't you write opeds for us?" I answered, "Why don't you stop rejecting them?" My oped career was born. And so forth. I thank these and many more, and lady luck who put us together. Of course my greatest thanks go to my wonderful wife, Elizabeth Fama. We met the night I returned to Chicago. It was love at first sight. We were engaged on the second date. She has been my best friend and constant companion ever since, though marriage to a passionate researcher, busy teacher and lover of time consuming sports cannot have been easy. Together we raised four amazing children, Sally, Eric, Jean, and Lake, who fill my heart with love, and now that they are grown a bit of nostalgia.