The Hockey Stick of Banking Regulation

Since the early days of the financial crisis, we've heard from many sources that it was caused by deregulation in the financial sector. Some economists and commentators blamed the crisis on general deregulation, while others pointed to the repeal of specific regulations over the last couple of decades as potential causes.

Recently, the Mercatus Center published RegData, which is a comprehensive measurement of regulatory restrictions by industry and by regulator. This index gives us a better picture of the regulatory environment at the industry level. I've referred to RegData in previous posts about EPA and USDA regulation of agriculture (here, here, here, here, and here).

In this post I provide some graphs and a brief discussion of banking regulation since 1970. This is an especially important issue in agriculture since ag lenders are likely to face liquidity issues due to low farm profits in coming years. 

Nobel Criticism and Agricultural Economics

This year's winner of the Prize in Economic Sciences in Memory of Alfred Nobel went to Princeton economist Angus Deaton. The internet was abuzz with commentary all day, so this post is a bit late.

I would wager that most ag economists who took PhD consumer demand after 1980 used "Economics and Consumer Behavior" by Angus Deaton and John Muellbauer in that course. For those of us who don't work in development, Deaton's work on the Almost Ideal Demand System was probably our introduction to him. The blog posts I read today (here, here, here, and here) brought me up to speed on his tremendous contributions and I certainly recommend reading them.

As the title suggests, I read another commentary on the Econ Nobel that was notable for its negativity toward the prize and (at least the author seems to think) to economics in general. The article, written by anthropologist Joris Luyendijk, excoriates the Sveriges Riksbank (the Swedish central bank behind the Econ Nobel and its $1 million cash prize) for failing to present the award to social scientists in different fields, and the economics profession in general for its inability to live up to its claimed status as a science.

Certainly there's a lot packed into the article, but I just want to respond to a few things. First, no one is stopping any organization interested in sociology, anthropology, or political science from establishing an annual prize for contributions to those fields.

Julien Noizet on Monetary Policy

This is part 3 in an interview series with Julien Noizet. For more about Julien, see the first post.

The interview questions are:
Why do you think inflation has been low in US after the 2008 recession?
What is the most important thing economists get wrong about the way banks work? 
What are your thoughts on NGDP targeting?
What are your thoughts on free banking?


FH: What are your thoughts on NGDP targeting?

JN: I am definitely open to the idea. I believe NGDP targeting would be a strong improvement on the current inflation targeting dogma. It would lead to a more stable economic framework, would at last (in theory) release central bankers from error-prone discretionary policies, respecting the concept of the rule of law. While not my ideal, I still see NGDP targeting as a step in the right direction.

Julien Noizet on What Economists Get Wrong About Banking

This is part 2 in an interview series with Julien Noizet. The first post can be found here.

The interview questions are:
Why do you think inflation has been low in US after the 2008 recession?
What is the most important thing economists get wrong about the way banks work? (this post)
What are your thoughts on NGDP targeting?
What are your thoughts on free banking?

FH: What is the most important thing economists get wrong about the way banks work?

JN: There are a lot of misconceptions about banking among economists. Those misconceptions vary by school of thought. The main problem with mainstream (neo, new classical and new Keynesian) economics is that they often forget banks altogether. Banks seem to merely represent a means of implementing monetary policy. Monetary policy seems to be considered in a vacuum. The issue here is that banking isn’t free. It is actually the most regulated industry on this planet. Bankers are market actors that react to incentives. This can lead to severely distorted economic effects.

Julien Noizet on Low Inflation

Julien Noizet's blog is, in my mind, indispensable. Julien is a banker who also understands economics very well; a combination that allows him to offer unique insights into macroeconomics and banking. I've featured content from his blog in the past and wanted to get his thoughts on recent macroeconomic trends and banking theory. Julien was kind enough to answer 4 questions I thought Farmer Hayek readers might be interested in.

The questions are:
Why do you think inflation has been low in US after the 2008 recession? (this post)
What is the most important thing economists get wrong about the way banks work?
What are your thoughts on NGDP targeting?
What are your thoughts on free banking?

I'll provide links in each post to the other 3 as they come out.

FH: Why do you think inflation has been low in the US after the 2008 recession?

JN: First, it depends what we mean by inflation. If we simply mean ‘CPI inflation’, then the reasons aren’t fully clear. The ability of the banking system to expand lending has been multiplied by the large amounts of reserves injected into the system through the various QE programmes. Excess reserves have jumped and the money multiplier has collapsed, indicating that banks haven’t increased lending volume much. However, it is a mistake to believe that inflation would sky-rocket within years of this massive liquidity injection by the Fed. The crisis involved a balance sheet-led recession, meaning that many banks and bank customers were insolvent. In such case, people and companies attempt to clean up their balance sheet before borrowing again. The experience of the Great Depression clearly showed that it can take decades for the money multiplier to get back to its previous highs.