TBTF policies seem to have played a role in the collapse of the financial systems and economies in a number of developing countries over the last decade or so.
When franchise value is high, owners and managers have something to lose, and they should take steps to make failure less likely. Franchise value depends, in part, on the level of competition in the relevant markets. Because competition in banking is often limited by regulation, banks could have an easier time generating future profits than firms in other, more competitive industries.
But now governments have relaxed some of the regulations that limited the ability of banks to enter a market and compete with established firms. New financial technologies also have raised the level of competition banks face.
Besides encouraging excessive risk-taking and wasting resources, there is a second manner in which expectation of TBTF coverage could lead to inefficiency. Recent work continues to cite this negative effect on innovation as one of the most damaging aspects of government control or influence of private sector firms.
Showing posts with label Eco 211 reading. Show all posts
Showing posts with label Eco 211 reading. Show all posts
1/17/2013
1/13/2013
The theory of money
double coincidences of want and single coincidence of want
The origin of money (as distinct from coin, which is only one variety of money) is, as we have seen, entirely natural and thus displays legislative influence only in the rarest instances. Money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence. Certain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the state.
Because money is a natural product of human economy, the specific forms in which it has appeared were everywhere and at all times the result of specific and changing economic situations.
The chief defects involved in the use of the precious metals for monetary purposes are: (1) the difficulty of determining their genuineness and degree of fineness, and (2) the necessity of dividing the hard material into pieces appropriate to each particular transaction. These difficulties cannot be removed easily without loss of time and other economic sacrifices.
The economic importance of the coin, therefore, consists in the fact that (apart from saving us from the mechanical operation of dividing the precious metal into the required quantities) its acceptance saves us the examination of its genuineness, fineness, and weight. When we pass it on, it saves us from giving proof of these facts. Thus it frees us from many irksome, wearisome, procedures involving economic sacrifices, and as a consequence of this fact, the naturally high marketability of the precious metals is considerably increased.
The origin of money (as distinct from coin, which is only one variety of money) is, as we have seen, entirely natural and thus displays legislative influence only in the rarest instances. Money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence. Certain commodities came to be money quite naturally, as the result of economic relationships that were independent of the power of the state.
Because money is a natural product of human economy, the specific forms in which it has appeared were everywhere and at all times the result of specific and changing economic situations.
The chief defects involved in the use of the precious metals for monetary purposes are: (1) the difficulty of determining their genuineness and degree of fineness, and (2) the necessity of dividing the hard material into pieces appropriate to each particular transaction. These difficulties cannot be removed easily without loss of time and other economic sacrifices.
The economic importance of the coin, therefore, consists in the fact that (apart from saving us from the mechanical operation of dividing the precious metal into the required quantities) its acceptance saves us the examination of its genuineness, fineness, and weight. When we pass it on, it saves us from giving proof of these facts. Thus it frees us from many irksome, wearisome, procedures involving economic sacrifices, and as a consequence of this fact, the naturally high marketability of the precious metals is considerably increased.
commodity money
commodity money has the great advantage of being an item of consumption and a means of exchange. Unlike paper money and cheap coins that can easily lose their face value, commodity money has a value in and of itself and thus can always be consume whatever the status of the market is.
The use of commodity money has never disappeared, and it rises again whenever the normal flow of commerce and economic life is interrupted. Consumable commodities such as tobaccos and chocolates serve as adequate means of exchange, but they cannot perform the full function of money.
(1) they make a poor store of value (deterioration leads to loss of value)
(2) commodities money is accepted because people see value in it, but geographical difference implies that one particular kind of commodity money may not be accepted elsewhere.
(3) the value of commodity money is not widely fungible due to its natural size
Money never exists in a cultural and social vacuum.
The use of commodity money has never disappeared, and it rises again whenever the normal flow of commerce and economic life is interrupted. Consumable commodities such as tobaccos and chocolates serve as adequate means of exchange, but they cannot perform the full function of money.
(1) they make a poor store of value (deterioration leads to loss of value)
(2) commodities money is accepted because people see value in it, but geographical difference implies that one particular kind of commodity money may not be accepted elsewhere.
(3) the value of commodity money is not widely fungible due to its natural size
Money never exists in a cultural and social vacuum.
12/25/2012
Anatomy of a typical crisis
A model developed by Hyman Minsky is used to interpret the financial crises in the United States, Great Britain, and other market economies. The pro-cyclical changes in the supply of credit. During the expansion phase investors became more optimistic about the future and they revised upward their estimates of the profitability of a wide range of investments and so they became more eager to borrow. At the same time, both the lenders' assessments of the risk of individual investments and their risk averseness declined and so they became more willing to make loans, including some for investments that previously had seemed too risky.
When the economic conditions slowed, the investors became less optimistic and more cautious. At the same time, the loan losses of the lenders increased and they became much more cautious.
Minsky believed that the pro-cyclical increases in the supply of credit in good times and the decline in the supply of credit in less buoyant economic times led to fragility in financial arrangements and increased the likelihood of financial crisis. The instability in the supply of credit.
Minsky argued that the events that lead to a crisis start with a "displacement", some exogenous, outside shock to the macro system. The boom in the Minsky model is fueled by an expansion of credit.
The nature of the shock varies from one speculative boom to another. If the shock is sufficiently large and pervasive, the anticipated profit opportunities improve in at least one important industry sector.
The boom in the Minsky model is fueled by an expansion of credit. He argued that the growth of bank credit has been very unstable. One central policy issue centers on the control of credit from banks and from other suppliers of credit.
Three types of finance---hedge finance, speculative finance, Ponzi scheme. Hedge finance: anticipated operating income is more than sufficient to pay both the interest and scheduled reduction in its indebtedness.
Speculative finance: anticipated operating income is sufficient so it is abe to pay the interest; but the firm has to use cash from new loans to repay part or all of the amount due on maturing loans.
Ponzi finance: its anticipated operating income is not likely to be sufficient enough to pay the interest on its indebtedness on the scheduled due date; to get the cash the firm must either increase its indebtedness or sell its assets.
When the economy slows, the original hedge finance firms may be in speculative finance group, and the initial speculative finance firms may fall into the Ponzi finance category.
The term Ponzi scheme now is a generic term for the non-sustainable finance patterns.
When the economic conditions slowed, the investors became less optimistic and more cautious. At the same time, the loan losses of the lenders increased and they became much more cautious.
Minsky believed that the pro-cyclical increases in the supply of credit in good times and the decline in the supply of credit in less buoyant economic times led to fragility in financial arrangements and increased the likelihood of financial crisis. The instability in the supply of credit.
Minsky argued that the events that lead to a crisis start with a "displacement", some exogenous, outside shock to the macro system. The boom in the Minsky model is fueled by an expansion of credit.
The nature of the shock varies from one speculative boom to another. If the shock is sufficiently large and pervasive, the anticipated profit opportunities improve in at least one important industry sector.
The boom in the Minsky model is fueled by an expansion of credit. He argued that the growth of bank credit has been very unstable. One central policy issue centers on the control of credit from banks and from other suppliers of credit.
Three types of finance---hedge finance, speculative finance, Ponzi scheme. Hedge finance: anticipated operating income is more than sufficient to pay both the interest and scheduled reduction in its indebtedness.
Speculative finance: anticipated operating income is sufficient so it is abe to pay the interest; but the firm has to use cash from new loans to repay part or all of the amount due on maturing loans.
Ponzi finance: its anticipated operating income is not likely to be sufficient enough to pay the interest on its indebtedness on the scheduled due date; to get the cash the firm must either increase its indebtedness or sell its assets.
When the economy slows, the original hedge finance firms may be in speculative finance group, and the initial speculative finance firms may fall into the Ponzi finance category.
The term Ponzi scheme now is a generic term for the non-sustainable finance patterns.
12/22/2012
Financial crisis-a hardy perennial
Most of the bank failures in the 1980s and 1990s were systemic and involved all or most of the banks and financial institutions in a country. These crisis and bank failures resulted from the implosion of the asset price bubbles or from the sharp depreciation of national currencies in the foreign exchange market. They happened in three different waves: 1980s, beginning of 1990s and second half of 1990s.
Cycle of manias and panics results from the pro-cyclical changes in the supply of credit; the credit supply increases relatively rapidly in good times, and then when economic growth slackens, the rate of growth of credit has often declined sharply.
Non-sustainable patterns of financial behavior: asset prices today are not consistent with asset prices at distant future dates.
Bubble involves the purchase of an asset, usually real estate or a security, not because of the rate of return on the investment but in anticipation that the asset or security can be sold to someone else at an even higher price.
The term mania describes the frenzied patterns of purchases, often an increase in prices accompanied by an increase in trading volumes, individuals are eager to buy before the prices go further.
The dilemma of government intervention upon smoothing out mania and bubbles is moral hazard. That is, if central banks function as the last resort of lender, investors may be less cautious in investing.
The monetarist view is that the mania would not occur if the rate of growth of the money supply were stabilized or constant.
Cycle of manias and panics results from the pro-cyclical changes in the supply of credit; the credit supply increases relatively rapidly in good times, and then when economic growth slackens, the rate of growth of credit has often declined sharply.
Non-sustainable patterns of financial behavior: asset prices today are not consistent with asset prices at distant future dates.
Bubble involves the purchase of an asset, usually real estate or a security, not because of the rate of return on the investment but in anticipation that the asset or security can be sold to someone else at an even higher price.
The term mania describes the frenzied patterns of purchases, often an increase in prices accompanied by an increase in trading volumes, individuals are eager to buy before the prices go further.
The dilemma of government intervention upon smoothing out mania and bubbles is moral hazard. That is, if central banks function as the last resort of lender, investors may be less cautious in investing.
The monetarist view is that the mania would not occur if the rate of growth of the money supply were stabilized or constant.
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