The 1984 movie, A Passage to India (David Lean) set in 1920s India, has a scene where the ever-present lethal threat of cholera is discussed as Doctor Aziz lies sick of a fever.
Etymologically, the term “pest” derives from the Latin word “pestis” (pest, plague, curse). Hardly any disease had such cultural and historical relevance as the bubonic plague. Throughout the centuries, the plague was the most terrifying infectious contagious disease which generated a series of demographic crises. The plague epidemics influenced the evolution of society biologically and culturally speaking. The Black Death was one of the most devastating pandemics in human history, is estimated to have killed 30%–60% of Europe’s population, reducing the world’s population from an estimated 450 million to between 350 and 375 million in 1400. This has been seen as having created a series of religious, social and economic upheavals, which had profound effects on the course of European history. It took 150 years for Europe’s population to recover.
It was a critical and popular success, offering a radically new interpretation of the extraordinary impact of infectious disease on cultures and world history itself.
We keep trying to offer the view that holism must “rule” the discovery of a “major” or “field” in education.
This holism means placing on the “mental plate in front of the student” these dimensions of reality, considering that every student is first and always a person.
“This is your life.” Every person (the predecessor to being a student) is born, lives and dies. Your education is part of this larger truth and you the student, being shrewd in the largest sense, wants to “factor in” the larger frameworks of book-learning (i.e., life itself).
Shrewdness cannot be restricted to a ZIP code in a state that will be advantageous income-wise for orthodontists, divorce lawyers or pediatricians. Concern over “ZIP codes” when starting a career is fine and valid. However, it can’t be enough since the student is, as a person, more than a career “Olympic swimmer.”
Micro-shrewdness (i.e., career tactics and smarts) has to be supplemented by “macro-shrewdness” (“this is my life” thinking). You have to carry some “enchantment” from your education with you, or the life you have will be desiccated or insipid. Ultimately, you will “outsmart” yourself.
Max Weber (died in 1920), the great sociologist, says of that modern world that it involves “Entzauberung” (disenchantment, where only technical cost-benefit thinking is seen as valid). This Weber insight tells you that a student/person has to find something enchanting to carry him or her through life, its blows and its helter-skelter “shapelessness.”
This is why we “insist” on holism in education everywhere from Day 1 so that these various levels of shrewdness are contemplated together and overspecialized “rabbit holes” are seen more clearly in their limitedness. The process of overview-creating and overview-pondering in the life of every freshman must be combined with “career-cleverness” by itself.
One reason a kind of educational repair or re-education is so necessary is that the simplest truths of world history are never presented clearly and openly.
Here’s an aspect of “global inequality” that is completely overlooked or considered taboo:
One dimension or axis of world history is the world-historical “land question”—which groups “grabbed” gigantic pieces of the land surface of the earth and which didn’t.
A Putin can also invent his own regional “Monroe Doctrine” (i.e., stay out of my sphere of influence as randomly defined by me) and thus we have local (in this case, Russian) reinventions of America’s “Manifest Destiny” and the “Monroe Doctrine.”
This inchoate “relativism” at the heart of human affairs guarantees instability and mayhem and “historical inequality” (i.e., who gets to be “anarcho-lawless” and who doesn’t).
There can’t be a real education without putting on the table, in front of him or her, on their “educational plate” all of these truths, from the personal to the impersonal to the world historical.
Fed President Patrick Harker Says It Will “Soon” Be Time to Taper Asset Purchases
Philadelphia Fed President Patrick Harker told a virtual audience at the Prosperity Caucus in Washington, D.C., that the asset purchases once necessary during the acute phase of the COVID-19 pandemic are no longer effective as a tool for supporting the economy. He also said the U.S. economy created millions of jobs in recent months, but “we just can’t fill them.”
Economic Outlook: Growth Despite Constraints
Good evening! Thanks so much for having me. I understand that when this group meets in person there is usually pizza involved — so I intend to collect on that debt next time we do this in the flesh.
I plan to offer a few remarks about the state of the national economy and the path of Federal Reserve policy. Then we can move to our Q&A, which I’m really looking forward to.
I know this group encompasses a very diverse crowd — we have everyone from House staffers to Senate staffers here. So, just in case anyone doesn’t know, I want to begin by giving you a very brief explanation of what, exactly, a regional Federal Reserve Bank is. Our nation’s central bank, after all, is quite unusual — unique, even — in its design.
The Board seats seven governors, including the Chair. Each regional Bank has its own president and board of directors, which is made up of business, banking, and community leaders from the area. Fundamentally, this provides the Fed with a perspective — within each District — of the sectors and issues that make the region tick. Mine is the Third District, which encompasses eastern Pennsylvania, South Jersey, and the state of Delaware. We’re the smallest District geographically, but I like to think we punch above our weight.
While the rest of us don’t always vote, we do always represent our Districts and play a part in the discussion. If you were at a normal FOMC meeting, you probably wouldn’t be able to tell a voting member until the end of the meeting when it’s time to raise hands. Everybody contributes.
The United States has a unique set of needs. It’s easy to forget that we’re an outlier because we’re such a massive country: Only Russia and Canada are bigger geographically, only China and India have larger populations, and no one country has a bigger economy, at least for now. And that economy is vast, spreading across sectors and natural resources in a way that is not typical of other nations.
And what that information is telling us is that, for the past 18 months, the economy has moved in tandem with the waxing and waning of the COVID-19 pandemic. During periods when case rates and hospitalizations have declined, the economy has surged as Americanconsumers have voted with their wallets. When COVID-19 risks abate, more Americans dine out at restaurants, check in to hotels, and fill up airplanes. Those are important categories of spending in a country where consumption makes up about 70 percent of total economic activity. In the second quarter of this year, for instance, GDP grew at a very healthy annualized rate of around 6.7 percent as case rates plummeted.
And, of course, the opposite occurs during periods when the virus spikes. When the Delta variant of COVID-19 erupted, fomenting the country’s fourth major wave of the pandemic, things started moving sideways. Consumer confidence tanked, and large industries like hospitality and leisure stagnated at best. So for this quarter, we can expect growth to come in at an annualized rate of around 3 percent, a sharp slowdown from earlier this year.
But there are reasons to be sanguine that the country’s recovery from this wave of COVID-19 may prove more durable than in the past and that we can avoid a fifth wave. And that is because more than half of the country is fully vaccinated. Getting more shots into arms will save lives and aid the recovery by reducing the size and severity of future spikes. The Delta variant has also concentrated minds: It seems to have not only persuaded more Americans to get shots on their own, but it also pushed more corporations and institutions to mandate their employees to get vaccinated. That is cause for optimism.
Filling me with less optimism is the persistent constraints the economy is operating under.
The COVID-19 pandemic has revealed how fragile many of our supply chains are. We’re now experiencing shortages of crucial parts like computer chips, which has hobbled not only the production of cars and trucks, but also comparatively smaller durable goods like home appliances. My recent experience attempting to purchase a printer — there were essentially none at my local electronics store — testifies to that. And good luck trying to find a new washing machine or dishwasher.
These supply chain constraints are rippling through the entire economy. Manufacturers in our region have reported having to curtail production because of difficulties securing raw materials. We’re also seeing low inventory of everything from shoes to backpacks to even chicken wings, which is a particularly troubling development as the NFL season is picking up. Unfortunately, there are indications that these constraints could persist for a couple of more years.
There’s another input lacking in supply as well, further constraining the economy: labor. It isn’t true, as was widely reported, that the economy only created 194,000 jobs in September. In reality, the U.S. economy has created many millions of jobs in recent months — we just can’t fill them. Indeed, job openings are at record highs, hitting nearly 10.5 million at the end of August. Simultaneously, more people are quitting their jobs, and the rate at which open positions are being filled is continuing to slow.
It seems that a combination of factors — trouble accessing childcare or eldercare, lingering fears about the virus, the rise in equities and home values spurring people to retire, and perhaps a general revaluation of life choices — is persuading a lot of Americans to stay on the sidelines even as the economy has reopened. And notably, the elimination of extra federal unemployment benefits has not — at least not yet — appeared to nudge people back into the workforce. I do expect that will change eventually and especially as other forbearance programs run out.
So, where does all of this leave us? For 2021, I would expect GDP growth to come in around 5.5 percent, which is a downward revision from before Delta took hold. Growth will then moderate to about 3.5 percent in 2022, and 2.5 percent in 2023. Inflation, meanwhile, should come in around 4 percent for 2021, though I do see upside risk here. After that, our modal forecast — that is, the average of all of our forecasts — calls for inflation of a bit over 2 percent for 2022 and right at 2 percent in 2023.
Fed Policy
In terms of monetary policy, I am in the camp that believes it will soon be time to begin slowly and methodically — frankly, boringly — taper our $120 billion in monthly purchases of Treasury bills and mortgage-backed securities. This comes down to the efficacy of these purchases as a tool.
They were necessary to keep markets functioning during the acute phase of the crisis. But to the extent that we are still dealing with a labor force issue, the problem lies on the supply side, not with demand. You can’t go into a restaurant or drive down a commercial strip without noticing a sea of “Help Wanted” signs. Asset purchases aren’t doing much — or anything — to ameliorate that.
After we taper our asset purchases, we can begin to think about raising the federal funds rate. But I wouldn’t expect any hikes to interest rates until late next year or early 2023, unless the inflation picture changes dramatically.
Conclusion
Given the strong headwinds facing the economy, it is a testament to its underlying strength that growth continues at a relatively robust pace. That is a tribute, as always, to the ingenuity and tenacity of our people, especially in the face of huge challenges.
Thank you very much again for having me. And now let’s move on to questions.
“The wealthy countries must begin providing public climate finance at the scale necessary to support not only adaptation but loss and damage as well, and they must do so in accordance with their responsibility and capacity to act.” This is the main message of a technical report titled “Can Climate Change-Fueled Loss and Damage Ever Be Fair?” launched on the eve of the UN Climate Change Conference (COP25) to be held in Madrid from 2 to 13 December.
The U.S. and the EU owe more than half the cost of repairing future damage says the report, authored by Civil Society Review, an independent group that produces figures on what a “fair share” among countries of the global effort to tackle climate change should look like.
“The poorer countries are bearing the overwhelming majority of the human and social costs of climate change. Consider only one tragic incident—the Cyclones Idai and Kenneth—which caused more than $3 billion in economic damages in Mozambique alone, roughly 20% of its GDP, with lasting implications, not to mention the loss of lives and livelihoods” argues the report. “Given ongoing and deepening climate impacts, to ensure justice and fairness, COP25 must as an urgent matter operationalize loss and damage financing via a facility designed to receive and disburse resources at scale to developing countries.”
The UN Framework Convention on Climate Change (UNFCCC) has defined loss and damage to include harms resulting from sudden-onset events (climate disasters, such as cyclones) as well as slow-onset processes (such as sea level rise). Loss and damage can occur in human systems (such as livelihoods) as well as natural systems (such as biodiversity).
Eight weeks after Hurricane Dorian—the most intense tropical cyclone to ever strike the Bahamas—Prime Minister of Barbados, Mia Amor Mottley, spoke at the United Nations Secretary General’s Climate Action Summit. She said: “For us, our best practice traditionally was to share the risk before disaster strikes, and just over a decade ago we established the Caribbean Catastrophic Risk Insurance Facility. But, the devastation of Hurricane Dorian marks a new chapter for us. Because, as the international community will find out, the CCRIF will not meet the needs of climate refugees or, indeed, will it be sufficient to meet the needs of rebuilding. No longer can we, therefore, consider this as an appropriate mechanism…There will be a growing crisis of affordability of insurance.”
An April 2019 report from ActionAid revealed the insurance and other market based mechanisms fail to meet human rights criteria for responding to loss and damage associated with climate change. The impact of extreme natural disasters is equivalent to an annual global USD$520 billion loss, and forces approximately 26 million people into poverty each year.
Michelle Bachelet, UN High Commissioner for Human Rights, recently warned that the climate crisis is the greatest ever threat to human rights. It threatens the rights to life, health, housing and a clean and safe environment. The UN Human Rights Council has recognized that climate change “poses an immediate and far reaching threat to people and communities around the world and has implications for the full enjoyment of human rights.” In the Paris Agreement, parties to the UN Framework Convention on Climate Change (UNFCCC) acknowledged that they should—when taking action to address climate change—respect, promote and consider their respective obligations with regard to human rights. This includes the right to health, the rights of indigenous peoples, local communities, migrants, children, persons with disabilities and people in vulnerable situations and the right to development, as well as gender equality, the empowerment of women and intergenerational equity. Tackling loss and damage will require a human-rights centered approach that promotes justice and equity.
Across and within countries, the highest per capita carbon emissions are attributable to the wealthiest people, this because individual emissions generally parallel disparities of income and wealth. While the world’s richest 10% cause 50% of emissions, they also claim 52% of the world’s wealth. The world’s poorest 50% contribute approximately 10% of global emissions and receive about 8% of global income. Wealth increases adaptive capacity. All this means that those most responsible for climate change are relatively insulated from its impacts.
Between 1850 and 2002, countries in the Global North emitted three times as many greenhouse gas (GHG) emissions as did the countries in the Global South, where approximately 85% of the global population resides. The average CO2 emissions (metric tons per capita) of citizens in countries most vulnerable to climate change impacts, for example, Mozambique (0.3), Malawi, (0.1), and Zimbabwe (0.9), pale in comparison to the average emissions of a person in the U.S. (15.5), Canada (15.3), Australia (15.8), or UK (6).
In the 1980s, oil companies like Exxon and Shell carried out internal assessments of the carbon dioxide released by fossil fuels, and forecast the planetary consequences of these emissions, including the inundation of entire low-lying countries, the disappearance of specific ecosystems or habitat destruction, destructive floods, the inundation of low-lying farmland, and widespread water stress.
Nevertheless, the same companies and countries have pursued high reliance on GHG emissions, often at the expense of communities where fossil fuels are found (where oil spills, pollution, land grabs, and displacement is widespread) and certainly at the expense of public understanding, even as climate change harms and risks increased. Chevron, Exxon, BP and Shell together are behind more than 10% of the world’s carbon emissions since 1966. They originated in the Global North and its governments continue to provide them with financial subsidies and tax breaks.
Responsibility for, and capacity to act on, mitigation, adaptation and loss and damage varies tremendously across nations and among classes. It must also be recognized that the Nationally Determined Contributions (climate action plans or NDCs) that have thus far been proposed by the world’s nations are not even close to being sufficient, putting us on track for approximately 4°C of warming. They are also altogether out of proportion to national capacity and responsibility, with the developing countries generally proposing to do their fair shares, and developed countries proposed far too little.
Unfortunately, as Kevin Anderson (Professor of Energy and Climate Change at the University of Manchester and a former Director of the Tyndall Centre for Climate Change Research) has said: “a 4°C future is incompatible with an organized global community, is likely to be beyond ‘adaptation,’ is devastating to the majority of ecosystems, and has a high probability of not being stable.”
Equity analysis
The report assess countries’ NDCs against the demands of a 1.5°C pathway using two ‘fair share’ benchmarks, as in the previous reports of the Civil Society Equity Review coalition. These ‘fair share’ benchmarks are grounded in the principle-based claims that countries should act in accordance with their responsibility for causing the climate problem and their capacity to help solve it. These principles are both well-established within the climate negotiations and built into both the UNFCCC and the Paris Agreement.
To be consistent with the UNFCCC’s equity principles—the wealthier countries must urgently and dramatically deepen their own emissions reduction efforts, contribute to mitigation, adaptation and addressing loss and damage initiatives in developing countries; and support additional sustainable actions outside their own borders that enable climate-compatible sustainable development in developing countries.
For example, consider the European Union, whose fair share of the global emission reduction effort in 2030 is roughly about 22% of the global total, or about 8 Gigatons of CO2 equivalent (GtCO2eq). Since its total emissions are less than 5 GtCO2eq, the EU would have to reduce its emissions by approximately 160% per cent below 1990 levels by 2030 if it were to meet its fair share entirely through domestic reductions. It is not physically possible to reduce emissions by more than 100% domestically. So, the only way in which the EU can meet its fair share is by funding mitigation, adaptation and loss and damage efforts in developing countries.
Today’s mitigation commitments are insufficient to prevent unmanageable climate change, and—coming on top of historic emissions—they are setting in motion devastating changes to our climate and natural environment. These impacts are already prevalent, even with our current global average surface temperature rise of about 1°C. Impacts include droughts, firestorms, shifting seasons, sea-level rise, salt-water intrusion, glacial retreat, the spread of vector borne diseases, and devastation from cyclones and other extreme weather events. Some of these impacts can be minimized through adaptation measures designed to increase resilience to inevitable impacts.
These measures include, for example, renewing mangroves to prevent erosion and reduce flooding caused by storms, regulating new construction so that buildings can withstand tomorrow’s severe weather, using scarce water resources efficiently, building flood defenses, and setting aside land corridors to help species migrate. It is also crucial with such solutions that forest dwelling and indigenous peoples be given enforceable land rights, for not only are such rights matters of basic justice, they are also pragmatic recognitions of the fact that indigenous peoples have successfully protected key ecosystems.
Tackling underlying social injustices and inequalities—including through technological and financial transfers, as well as though capacity building—would also contribute to increasing resilience. Other climate impacts, however, are unavoidable, unmanageable or unpredictable, leading to a huge degree of loss and damage. Experts estimate the financial damage also will reach at least USD$300-700 billion by 2030, but the loss of locally sustained livelihoods, relationships and connections to ancestral lands are incalculable.
Failure to reduce GHG emissions now—through energy efficiency, waste reduction, renewable energy generation, reduced consumption, sustainable agriculture and transport—will only deepen impacts in the future. Avoidable impacts require urgent adaptation measures. At the same time, unavoidable and unmanageable change impacts—such as loss of homes, livelihoods, crops, heat and water stress, displacement, and infrastructure damage—need adequate responses through well-resourced disaster response plans and social protection policies.
For loss and damage financing, developed countries have a considerable responsibility and capacity to pay for harms that are already occurring. Of course, many harms will be irreparable in financial terms. However, where monetary contributions can help restore the livelihoods or homes of individuals exposed to climate change impacts, they must be paid. Just as the EU’s fair share of the global mitigation effort is approximately 22% in 2030, it could be held accountable for that same share of the financial support for such incidents of loss and damage in that year.
The table below provides an illustrative quantification of this simple application of fair shares to loss and damage estimates, and how they change if we compute the contribution to global climate change from the start of the industrial revolution in 1850 or from 1950.
Table 1: Countries’ Share of Global Responsibility and Capacity in 2019, the time of Cyclones Idai and Kenneth, as illustrative application of a fair share approach to Loss and Damage funding requirements.
The advantage of setting out responsibility and capacity to act in such numerical terms is to drive equitable and robust action today. Responsible and capable countries must—of course—ensure that those most able to pay towards loss and damage repairs are called upon to do so through domestic legislation that ensures correlated progressive responsibility. However, it should also motivate mitigation action to ensure that harms are not deepened in the future.
In the Equity analysis used here, capacity—a nation’s financial ability to contribute to solving the climate problem—can be captured by a quantitative benchmark defined in a more or less progressive way, making the definition of national capacity dependent on national income distribution. This means a country’s capacity is calculated in a manner that can explicitly account for the income of the wealthy more strongly than that of the poor, and can exclude the incomes of the poorest altogether. Similarly, responsibility—a nation’s contribution to the planetary GHG burden—can be based on cumulative GHG emissions since a range of historical start years, and can consider the emissions arising from luxury consumption more strongly than emissions from the fulfillment of basic needs, and can altogether exclude the survival emissions of the poorest. Of course, the ‘right’ level of progressivity, like the ‘right’ start year, are matters for deliberation and debate.1
The report acknowledges “the difficulties in estimating financial loss and damage and the limited data we currently have,” but it recommends nevertheless “a minimal goal of providing at least USD$300 billion per year by 2030 of financing for loss and damage through the UNFCCC’s Warsaw International Mechanism for Loss and Damage (WIM).” Given that this corresponds to a conservative estimate of damage costs, the report further recommends “the formalization of a global obligation to revise this figure upward as observed and forecast damages increase.”
The new finance facility should provide “public climate financing and new and innovative sources of financing, in addition to budget contributions from rich countries, that can truly generate additional resources (such as air and maritime levies, Climate Damages Tax on oil, gas and coal extraction, a Financial Transaction Tax) at a progressive scale to reach at least USD$300 billion by 2030.” This means aiming for at least USD$150 billion by 2025 and ratcheting up commitments on an annual basis. Ambition targets should be revised based on the level of quantified and quantifiable harms experienced.
Further, developing countries who face climate emergencies should benefit from immediate debt relief–in the form of an interest-free moratorium on debt payments. This would open up resources currently earmarked for debt repayments to immediate emergency relief and reconstruction.
Finally, a financial architecture needs to be set up that ensures funding reaches the marginalized communities in developing countries, and that such communities have decision making say over reconstruction plans. Funds should reach communities in an efficient and effective manner, taking into account existing institutions as appropriate.
Currently, the Paris Rulebook allows countries to count non-grant instruments as climate finance, including commercial loans, equity, guarantees and insurance. Under these rules, the United States could give a USD$50 million commercial loan to Malawi for a climate mitigation project. This loan would have to be repaid at marketinterest rates—a net profit for the U.S.—so its grant-equivalence is $0. But under the Paris Rulebook, the U.S. could report the loan’s face value ($50 million) as climate finance. This is not acceptable. COP25 must ensure that the WIM has robust outcomes and sufficient authority to deliver a fair and ambitious outcome for the poorest and most vulnerable in relation to loss & damage.
Note
For more details, including how progressivity is calculated and a description of the standard data sets upon which those calculations are based, see the referenceproject page. For an interactive experience and a finer set of controls, see the Climate Equity Reference Calculator. (return to text)
Despite the increased access to higher education, challenges remain. Low employability of graduates, poor-quality of teaching, faculty shortages, an over-regulated regime, lack of autonomy and investment in research and innovation plague the sector. The limited assessment and accreditation capacity of government bodies such as NAAC and NBA has also been a significant barrier in linking the performance of an institution with autonomy and funding decisions.
If India is serious about investing in human capital and curbing youth unemployment, it must tackle the problems plaguing the higher education sector. A new Brookings India report on Reviving Higher Education in India [archived PDF] by Shamika Ravi, Neelanjana Gupta, and Puneeth Nagaraj takes a wider view of the urgent reforms needed. The report takes a closer look at key aspects, including: enrollment, employment and quality; governance and accountability; funding with a focus on efficiency, transparency and affordability; research and innovation; and the regulatory system. As the government evaluates proposals to reform the University Grants Commission and implement the recently proposed Draft New Education Policy 2019, the report also offers concrete recommendations and suggestions that have the potential to shape this critical sector in the next few years.
This post reviews many of the papers and presentations from the workshop dealing with both financial regulation and innovations in financial technology. It also reviews one of the keynote speeches on the important topic of corporate governance. A companion macroblog post summarizes the workshop’s discussion of digital currencies.
Post-crisis changes in regulation
Some banks had difficulty obtaining adequate funding from private financial markets during the crisis of 2007–08, despite being well capitalized by that period’s capital standards. In part, these funding difficulties were a result of bank depositors fearing that banks had not adequately provisioned for their credit losses.
A paper by University of Michigan professors Thomas Flanagan and Amiyatosh Purnanandam examines the question “Why Do Banks Hide Losses?” [PDF] with a particular focus on the role of shareholder monitoring and management incentives. One problem in conducting such a study is that of separating bad investment decisions from deceptive accounting. This paper exploits an unexpected change in regulation in India to help provide such separation. This regulatory change forced all of the banks in that country to detail the extent of their underreporting of loan losses in 2015. The paper finds that weaker shareholder monitoring and higher-power executive compensation contracts are associated with more underreporting of loan losses.1 This paper helps us to understand how banks exploit accounting discretion over loan losses and reinforces the importance of supervisory oversight.
The funding problems encountered by U.S. banks led to runs and ultimately the collapse of a few banks, but these problems had a significant effect on the operations of some banks that survived. One measure of the vulnerability of a bank to a funding shock was its reliance on uninsured, wholesale deposits from large institutions. Professors Sudheer Chava of Georgia Institute of Technology, Rohan Ganduri of Emory University, Linghang Zeng of Babson College, and graduate student Nikhil Paradkar of Georgia Tech examine one effect of these shocks in their paper “Shocked by Bank Funding Shocks: Evidence from 500 Million Consumer Credit Cards” [PDF]. The paper finds that banks that were more exposed to wholesale funding shocks made larger cuts in consumercredit lines than other banks. The authors further find that these cutbacks were made to the most credit-constrained customers (those with lower credit scores and higher utilization of their credit line). The results also suggest that these credit-constrained consumers responded by cutting back their consumption. Overall, these results provide additional support for regulatory policies intended to strengthen banks so that they can continue lending through future crises.
The Federal Reserve was created in 1913 in large part to provide a source of liquidity during periods of stress in bank lending markets. Yet banks proved surprisingly resistant to borrowing from the Fed’s discount window at the start of the funding problems in the fall of 2007. In an attempt to overcome this reluctance to borrow, the Fed created the Term Auction Facility (TAF) in December 2007. A paper by professors Yunzhi Hu of the University of North Carolina at Chapel Hill and Hanzhe Zhang from Michigan State University examines the TAF in a paper titled “Overcoming Borrowing Stigma: The Design of Lending-of-Last-Resort Policies” [PDF]. This paper develops a simple model in which TAF funding is preferred by stronger banks because the funds are only available with a delay (that is, the funds will not help a bank facing an immediate run) and because TAF gives stronger banks the potential to borrow at lower costs. The paper also provides evidence that when both the discount window and TAF were available, the weakest banks borrowed from the discount window and the relatively stronger banks bid for TAF funds. The results of this study may help to inform the Fed’s policies on the provision of emergency liquidity in the future.
Issues related to bankcapital have been the subject of ongoing discussion among academics, bankers, and regulators since the crisis. Bank of Finlandeconomists Gene Ambrocio and Esa Jokivuolle, along with professors Iftekhar Hasan from Fordham University and Kim Ristolainen from the University of Turku, surveyed the views of banking and finance academics and reported the results in the paper “Are Bank Capital Requirements Optimally Set? Evidence from Researchers’ Views” [PDF] (slide deck [PDF]). The survey obtained results from 149 leading academic researchers. It found that most respondents believe that higher capital ratios would reduce the likelihood of a crisis and the social costs associated with a crisis. Most respondents thought an increase of 5 percentage points in capital would increase the average cost of capital and reduce banklending. However, a majority said that this reduction in lending would result in “minimal to no change” in economic activity.
Fintech lending
Banks have historically been important suppliers of credit to consumers and small businesses. However, since the crisis, lending by some fintech firms to these borrowers has grown rapidly. The conference addressed a variety of questions such as the sources of competitive advantage to fintechlenders; competition between fintech lenders, small banks, and large banks; and the impact of fintechlending on consumers. Additionally, the conference looked at post-crisis changes in banksecuritization rules, which may have some relevance to fintech lenders’ efforts to fund their loans.
Many large banks retreated from some types of retail and small business lending. In part, this pullback was likely to due to a combination of the increased riskiness of these loans and the tightening of bank capital requirements. However, fintechlenders have been expanding into some of the same spaces, raising the question of whether the reduced lending by big banks was due in part to competitive pressure from fintech firms. It also raises the question of whether smaller banks were also retreating due to increased competition or expanding to help fill the void left by the larger banks. Two papers examine the rise of fintechs in two different lending markets and analyze what developments in these markets tell us about big versus small banks.
An important issue for any type of lender is its access to funding. Banks fund their loans with a combination: (a) their own liabilities in the form of deposits and other market borrowings and (b) loan sales to investors. The risk with on-balance-sheet lending is that too many loans will turn bad, the bank will suffer large loan losses, and depositors will flee the bank. Although some fintech firms fund loans with their own liabilities, most of their loans are funded by sales to investors. The advantage to the loan originator of selling loans is that, if the loan goes bad, the buyers of the loan bear the credit losses. However, such sales can lead to concerns that the bank or fintech originating a loan will not be as careful in underwriting and monitoring as they would be with the loans they retain on their own books. The result can be similar to that discussed in the Chava et al. paper, where originators have to reduce their lending volume.
Spatt observed that the importance of proxy advisory firms is easy to understand. All shareholders in a firm face the same questions, and there is similarity in questions across firms. However, any one shareholder obtains only a small fraction of the gains from better governance while potentially paying all of the costs of analysis. In this setting, proxy advisory firms are a predictable market solution to a potential free-riding problem. The increasing returns to scale that arise in this setting also naturally lends itself to the development of a monopoly—or in this case, a duopoly. The result can be reduced incentives for the two proxy advisory firms to avoid factual mistakes and increased power for the advisers to impose their philosophy on firms. Spatt discussed a variety of steps the Securities and Exchange Commission has taken and further actions that could mitigate these concerns. However, the problem of what to do about the role of institutions and proxy advisers in corporate governance is one that may not be totally solvable, but rather requires careful management over time.
Conclusion
The post-crisis period has seen dramatic changes in both information technology and government regulation. The papers presented recently at a workshop at the Atlanta Fed analyzed a number of these changes and contribute to our understanding of how the financial system is likely to evolve in the future.
Larry D. Wall is executive director of the Center for Financial Innovation and Stability at the Atlanta Fed. The author thanks Brian Robertson for helpful comments. The view expressed here are the author’s and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. If you wish to comment on this post, please email atl.nftv.mailbox@atl.frb.org.
1 For further discussion on banks’ reporting of loan losses, see Larry’s recent post on changes to U.S. accounting rules.
(from ICRIER Newsletter | November 2019 | Vol. III, Issue 11)
The November 2019 issue of the Newsletter provides a quick recap of ICRIER’s research and policy engagements during the month of October 2019.
Three research reports were released by ICRIER last month in the areas of competition, trade and investment and climate change (See below).
ICRIER also organized consultation workshops, dissemination and outreach events during the month. ICRIER researchers published several articles in leading newspapers and other media platforms on a variety of current issues such as growth, agriculture, trade, FTAs, RCEP, single use plastics and the Economics Nobel. We sincerely hope that you will take a few moments to glance through these updates and engage further with anything that interests you. We hope you enjoy the newsletter’s new format. As always, we welcome your valuable feedback.
Competition Issues in India’s Mobile Handset Industry
(Rajat Kathuria, Mansi Kedia and Kaushambi Bagchi)
Using descriptive statistical analysis, this study examines trade and investment opportunities between India and 41 African and Asianeconomies (mostly LDCs) by focusing on the latter’s export opportunities in the Indian market and on India’s investment opportunities in the selected countries. It also discusses barriers to realizing the identified trade and investment opportunities between India and the selected economies, based on a review of the existing literature.
ICRIER hosted the ICANN66 Pre-Meeting Briefing on 18th October 2019 for its Indianstakeholders. This edition of the Pre-Meeting Briefing looked closely at the developments between ICANN65 and ICANN66 and highlighted some of the key policy discussions currently underway at ICANN. The event witnessed participation from various stakeholders from India, including representatives from the Ministry of Electronics & Information Technology (MeitY), National Internet Exchange of India (‘.in’ registry) along with Indian representatives active in various policy development processes at ICANN. ICANN65 was held in Montreal, Canada, between 2-7 November 2019. ICRIER will also be hosting the ICANN66 Readout during the first week of December 2019 to highlight some of the key takeaways from ICANN66.
Dissemination of the India-LDCs Trade and Investment Study
ICRIER organised Dissemination of the Report Exploring Trade and Investment Opportunities between India and Select African and Asian Economies on October 14, 2019 at Magnolia Hall, India Habitat Centre, Lodhi Road, New Delhi.
Welcome remarks were delivered by Dr. Rajat Kathuria, Director & CE, ICRIER and the Introductory Session was Chaired by Dr. Jayant Dasgupta, IAS (Retd.) Former Ambassador of India to the WTO. Dr. Anirudh Shingal, Sr. Fellow, ICRIER presented the key findings of the report, which was followed by a Panel discussion Chaired by Dr. Arpita Mukherjee, Professor, ICRIER.
