Home > Economic policy > In which I agree with the IPA

In which I agree with the IPA

July 24th, 2009

John Roskam of the IPA in today’s Fin makes the correct opening point that the banks can’t have it both ways, benefitting from government guarantees while resisting close regulation. Since no one is suggesting removing the guarantees any time soon, the implications are, I think pretty obvious.

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  1. Matt C
    July 24th, 2009 at 10:50 | #1

    And, it probably doesn’t matter if the guarantees are removed. The fact that they have been given when needed means that the banks (and markets) are likely to expect them in the future.

    Greater regulation is probably needed in to reign in the moral hazard.

  2. Joseph Clark
    July 24th, 2009 at 12:46 | #2

    This argument is specious. If I give someone a guarantee without them asking for it I do not earn rights over their actions. If you want to argue that governments should control banks you need to make the argument directly.

  3. David Allen
    July 24th, 2009 at 13:00 | #3

    Even a broken watch is correct twice a day.
    We in Melbourne have to put up with this tosser every Friday am on the abc. Needless to say, when his whiny voice comes on, I switch off.

  4. Fran Barlow
    July 24th, 2009 at 13:29 | #4

    At the time it was given, I thought a much less generous guarantee would have worked as well. One could have guaranteed the average balance, the highest balance during the last 12 months or an individual month’s salary — whichever was the highest in any account and charged a suitable sliding fee for anything above that say $2 per thousand or part thereof per annum.

    Simple.

  5. July 24th, 2009 at 14:50 | #5

    Since no one is suggesting removing the guarantees any time soon, the implications are, I think pretty obvious.

    I’d suggest we remove the government guarantees any time soon.

  6. Jim Birch
    July 24th, 2009 at 15:45 | #6

    Joseph, I believe it more a quip about a confluence that’s about as frequent as a total eclipse. You’ll find the actual argument made elsewhere on this blog. Isn’t it also possibly specious to use an argument based on the government being “someone”?

  7. Alice
    July 24th, 2009 at 16:32 | #7

    Terje – the banks appear willing to sell out the IPA..funny about that – they dont mind a helping hand do they? But when it comes to the removal of costly regulation they probably donate to IPAs funds and enlist their assistance…cant have it both ways. Roskam is right but the banks wont care. I guess thats what is making Roskam all hot under the collar.

  8. July 24th, 2009 at 17:04 | #8

    But when it comes to the removal of costly regulation they probably donate to IPAs funds and enlist their assistance

    Personally I doubt it. The likes of the IPA like their independence. However you probably presume every think tank that isn’t funded by the government must be doing something dodgy.

  9. Alice
    July 24th, 2009 at 17:57 | #9

    Mostly they are Terje!

  10. Alice
    July 24th, 2009 at 18:36 | #10

    But Terje – the think tanks I mostly think are up to something very dodgy are those where their execs are either coal or mining execs or coal or mining supply chain execs….like the IPA.

  11. Alice
    July 24th, 2009 at 18:38 | #11

    They would like to have the banks onside, for sure Terje, but they can only get mining because mining gets huge subsidies already and they are happy to ignore that for greater costly regulation removal.
    Either way Terje – the IPA is a vested interests rag.

  12. Ikonoclast
    July 24th, 2009 at 21:22 | #12

    OK Joseph Clark, I’ll make (and have made before) the argument directly. The government should implement greater direct controls on banks and the financial system in general. The government should also offer deposit guarantees to selected banks which they may take up if they agree to meet further stipulated controls.

    Perhaps you’ll understand an analogy. Steady continuous control of a horse is better than letting it bolt and then having to struggle to rein it in. Essentially, western governments let the financial system have its head and it went crazy (with greed and stupidity), bolted for the oats (endless fat profits), become bloated and keeled over (Global Financial Crisis) and had to be rescued by the vet (emergency government intervention).

    Or perhaps you would prefer to allow these enormously inefficient boom and bust cycles generated by the inherent instability of unregulated markets to just run wild and ruin millions of lives?

  13. July 25th, 2009 at 00:49 | #13

    Alice,
    You seem to have the wrong end of the stick. The big banks like the regulation. It is the regulation that makes it very expensive and difficult to start up a competitor to the big banks in Australia.
    It is the regulation that makes it very difficult for smaller banks to prosper.
    It is not that difficult to understand. Regulation introduces high and fairly fixed compliance costs. The cost per dollar deposited drops substantially as you grow. You keep calling for more of that which makes the big banks bigger and richer. Odd.

  14. July 25th, 2009 at 01:00 | #14

    PrQ,
    On deposit insurance – you may like to look at the latest paper on this from the BIS – it is here. As it was written for use in many countries it merely attempts to set out how, in the opinion of the BIS, these need to be set up. The principles they set out, though are generally sound.
    .
    In general, though, I would agree with Terje – the banks did not ask for these guarantees, did not need them and would be happy if they went. What is the possible justification for keeping them?

  15. Ernestine Gross
    July 25th, 2009 at 07:37 | #15

    JC, Terje, A.R.,

    The Australian banks might not have asked for guarantees (before they were offered) but the public wanted to have assurance that their deposits are government guaranteed. It is perfectly rational for individuals to wish to protect their savings.

    Fran Barlow, people don’t pay with ‘averages’ or max[a, b] amounts. They pay with the dollars they own or borrow. People’s expenditure plans, wealth, income differ. There is a distinction between simple and simplistic.

    A.R. The idea (left over from the economic rationalism days) that competition works in the banking system as it does for fruit and vegetable growers is not a good one. For example, going back to the 1970s, Radner’s paper showed very clearly that, in contrast to physical (as understood by scientists and not by the ASX) objects of choice, there is no natural bound on short-selling of financial securities. This is crucial.

    Ikonoclast, perhaps the verbal theoreticians on ‘free markets’ might argue that your analogy is flawed because if horses would be allowed to roam free of human constraints, the problem would not occur in the first place. The counter-argument, if I may continue, would be: o.k. then lets abolish the artificial person, called a corporation. Am I on the right track?

  16. Ikonoclast
    July 25th, 2009 at 08:31 | #16

    My analogy has its flaws but I think the general argument about steady control versus excessive laxity followed by emergency rescue (boom, bust, government intervention) holds true.

    Naturally, the free market zealots want to let the bust run its course. However, I suspect even they would start calling for government intervention when the hungry, angry mobs starting tearing down their mansions brick by brick. Typically, at this point, the intervention preferred by free market neocon zealots is deadly force administered by riot police and the army. Those of us who are more sensible prefer the democratic state apparatus to intervene earlier and in a more enlightened manner.

    Certainly corporations should not be accorded rights as if they were persons.

  17. Ikonoclast
    July 25th, 2009 at 08:36 | #17

    I might add (tongue in cheek of course) that if the horses were allowed to run free they would produce no useful work for the economy. Therefor the verbal theoreticians on ‘free markets’ would be wrong to make that argument.

    Note: This analogy contains the assumption that it applies (analogically of course) to a pre-industrial animal muscle powered economy.

  18. Alice
    July 25th, 2009 at 09:59 | #18

    @Ernestine Gross
    I agree with Ernestine. The banks may not have wanted the guarantees but I did and so did countless others and I might have formed part of a bank run – people WERE talking about it at the time of the crisis and after, ie what to do with their savings, which banks were safe etc. Id still rather have a public bank.

  19. Alice
    July 25th, 2009 at 10:02 | #19

    Ikono – at the time of the 1890s financial crash a British Treasury official was asked what to do about the problem of the unemployed ..the response? “Call in the Navy”. One solution employed was one way free tickets to the country “to look for work.” Jolly swagmen.
    You are right about the preferred use of deadly force.

  20. July 25th, 2009 at 10:39 | #20

    Alice,
    If you wanted the bank guarantees, why do you not pay for them? Why should the banks (and ultimately every shareholder and depositor) pay for what you wanted when it was completely unnecessary and may in fact bring on moral hazard? Where is the justice and equity in that?
    Not needed – you want it, surely you should pay for it.

  21. Kevin Cox
    July 25th, 2009 at 10:43 | #21

    The best way to control any system is to build control into the system itself so that the system “automatically” adjusts itself. The current financial and banking system has proven time and time again to be uncontrollable. The reason is that we increase the money supply through loans. This is an unstable mechanism and no amount of regulation will fix it – in fact the more regulation the more likely it is to get worse.

    Of course the government should guarantee money as it is says on each bank note that it is legal tender. Not only should bank notes be guaranteed but ALL deposit accounts in any authorised deposit taking institution should be guaranteed. Not only should it be guaranteed but it should be guaranteed to hold its value – that is there should be a guarantee that there is no inflation eroding the value of savings.

    Let us fix the system so that these guarantees can be met.

  22. July 25th, 2009 at 11:02 | #22

    Kevin,
    I have already shown you why the money supply is not increased (except in a simplistic mathematical sense) through bank lending. Do we need to go through it again?

  23. July 25th, 2009 at 13:06 | #23

    Naturally, the free market zealots want to let the bust run its course. However, I suspect even they would start calling for government intervention when the hungry, angry mobs starting tearing down their mansions brick by brick.

    I live in a nice suburb but the house is hardly a mansion. It’s a run down 1950s ugly white thing with only two bedrooms which means the three kids all bunk in the one room. A bit cold in winter but otherwise comfortable.

    Of course obviously all socialists live in mansions built by ripping off taxpayers. So they just presume we all get to live the elite lifestyle of a government lackey.

  24. Alice
    July 25th, 2009 at 14:04 | #24

    @Andrew Reynolds

    Andy asks me

    If you wanted the bank guarantees, why do you not pay for them? Why should the banks (and ultimately every shareholder and depositor) pay for what you wanted when it was completely unnecessary and may in fact bring on moral hazard? Where is the justice and equity in that?
    Not needed – you want it, surely you should pay for it.”

    Oh dear Andy – what will I do with this sort of logic?

    I wanted a bank guarantee after the crisis to keep my money in the bank (due to the higher uncertainty and risk associated with banks at which time, was unknown who was affected, which you as a man with knowledge of banks and the GFC should obviously be able to recognise).

    The bank could have given me a higher interest rate on my savings for higher risk but the bank didnt offer it. Otherwise I, and thousands of others were mulling over forming a bank run to get my own money back, which the bank borrowed from me (my deposit is a bank liability). The risk eroded the interest rate on my savings to zero or possibly even negative Andy if you want to talk price signals. Anyway we all know we sit on money when the interest rate is zero – why walk to the bank when under the mattress will do just as well.

    The govt didnt guarantee my funds to be nice to me Andy. The Govt guaranteed my money to stop me taking it out of the bank out and sending it to another country where there were guarantees (or just to stop me taking it out period) to protect not me, but Australian banks.

    Why on earth would I pay for that? I balanced up the risk of keeping my money in the bank against the guarantee and decided it was then safe to leave it there.

    Who gained from that exercise? The bank and the government (the financial system didnt go down).

    Why on earth would I pay for the guarantee Andrew? I received no benefit whatsoever from it. You dont pay a price where you get nothing. The bank should have offered a higher interest rate to stop mass withdrawals if you think the govt shouldnt intervene. I dont care either way. Im just acting on my own price signals if you dont mind. If they take the guarantee away…I might re think the risk.

    Seriously Andy, that was one of your sillier questions Andy…

  25. Donald Oats
    July 25th, 2009 at 16:27 | #25

    When there is a major crisis that infects the banks, people quite reasonably wonder if their deposits are at increased risk of evaporating. In a big crisis of the sort we are going through, an insured depositor may still be concerned that the insurance party won’t be able to meet its obligations either.

    A GFC is precisely the time that an insurance scheme for depositors is more likely to fail. The credit squeeze and ensuing liquidity difficulties in the financial sector may prevent a large insurance party from accessing the funds needed to cover their insurance obligations.

    Moral hazard or no moral hazard, it is hard to see an advantage to letting depositors pay for their deposit “protection”. When the crunch came AIG teetered on the brink, necessitating massive fund injection from the US government; a salutory lesson as to why it is erroneous to think that deposit insurance would ever work as advertised.

  26. Alice
    July 25th, 2009 at 18:36 | #26

    Depsoitors WONT pay for deposit insurance Don. Its quite simple. The banks want and need our deposits. Deposit insurance is no insurance at all to a depositor. People forget who has the power here and its depositors – either banks want our money or they dont and to take it (and profit from it) they need to offer a reasonable return. If they dont they are out of business…fairly simple I would have thought. They pay the insurance or government does in times of higher risk for depositors. A cost of running the business.

  27. July 25th, 2009 at 18:58 | #27

    Alice,
    But there was absolutely no call for any insurance. No ADI was ever at risk of failing and, if there had been big withdrawals, they could simply have offered higher rates.
    Contra your assertion, though – depositors do pay for deposit insurance one way or another. If it is government provided we pay for it both through a levy on deposits – AKA a fee (as in the US) or through our taxes (if this is not enough). If it is privately provided it is just through fees.
    Nothing comes from nothing and the banks have proven that they are good at getting fees out of us. Do you even think for a moment that they (and therefore their shareholders – i.e. us again through our super funds) will pay for this?

  28. Alice
    July 25th, 2009 at 19:03 | #28

    Andrew – risk is in the eye of the beholder! As a depositer, if there is higher risk I want a higher return – I dont care who pays for it. I dont care a fig but it wont be me (because I have the choice to take my money elsewhere) – its left to other interested parties to sort out.

  29. paul walter
    July 25th, 2009 at 22:06 | #29

    Poor Alice.
    You battle on single handedly against the forces of darkness.
    Andrew Reynolds comes up with a surprisingly intelligent comment, for him, early, about the banks liking regulation and then ruins his own case in later posts by suggesting that the plutocrats have it both ways- public liability; private gain.
    Back to the thread’s original point.

    …………………………………

    Ha, ha, ha…
    Fancy expecting an entity as timid as Labor to request reciprocity from a big busines formation. That’d be like expecting the Tasmanian government to introject a proper EPA process with Gunns activities, when these may impinge on the rights and lives of others.
    We can’t have these organisation going about their stuff without buggering it up for everyone else, now can we, ask the libertarian apologists for the new propertiest feudalism!

  30. July 25th, 2009 at 22:53 | #30

    Alice – so you are saying markets are efficient? That risk is correlated with return?
    If every bank has to pay deposit insurance, then all of them will face cost pressures to increase prices. This means – guess what – you end up paying for it.
    Ho hum.
    If you want deposit insurance, fine – you pay for it. If I want it, I should pay for it. If Joe Bloggs down the road is prepared to take the risk – why should he have to pay for it?

  31. ABOM
    July 26th, 2009 at 01:42 | #31

    How about EITHER (a) no central bank backstopping FRB embezzlers and a free market in money production OR (b) deposit insurance for fiat currency deposits and nationalization of the banking system, with heavy government regulation and pay rates for bankers akin to any other dumb, parastic, paper-shuffling government bureaucrat?

    No one seems to be critising the current corrupt, suicidal system where bankers make “free market” profits on the way up, and socialise the losses on the way down.

    I’d prefer Alice’s suggestion to the sick suicidal system we currently have.

  32. Alice
    July 26th, 2009 at 08:40 | #32

    @paul walter
    Paul Walter – thats kind of you to worry about me.

    But Im not alone to battle against the forces of darkness (or zombie bankers)….ABOM and I knock Andy out regularly. Andy only just recovered from his last pounding. He has been out to it for days…so Im surprised hes actually making any sense at all.

    And Andy – I dont want deposit insurance (I dont care less about it – if I dont feel safe putting my money in bank Ill take it out).The banks want deposit insurance to keep me from taking my money out of the bank, so the banks get to pay for it – I dont.

    Next you will be telling me I have to pay the bank to keep my money (and the banks need to receive interest on deposits because banking is so hard)…oh those poor, poor struggling banks…its enough to make you cry…

  33. Kevin Cox
    July 26th, 2009 at 08:45 | #33

    @Andrew Reynolds

    You have said banks do not create “money” and they do not lend out money on deposit but they give loans with money that is “bank money” and that goes away when the loan is repaid.

    The amount they can lend depends on the amount they are required to keep in a liquid form. The fraction is typically 10% and that money has to be kept in the liquid form. As you keep repeating the money that the bank gives me as a loan is not “real money” but is bank money.

    I am proposing a scheme where a deposit of “real money” is put into the bank at zero interest. The bank now makes a zero interest loan of “bank money” up to the amount allowed by the bank regulations. The money is repaid from the profits coming from the investment. The bank liquidity requirements are met with the deposit. The books of the bank show a loan against the borrower that matches the amount of money the borrower gets.

    Tell me the difference between what I am proposing and what you have said except that the deposit and the loans are at zero interest.

  34. Alice
    July 26th, 2009 at 08:56 | #34

    Paul,

    Dont worry about Andy either.

    Im just here batting for the average Joe saver but Andy is batting for the average Bernie banker. Im sure he wants one of those jobs as a pr guy eg when police go crazy with tazars or guns or being in cahoots with drug dealers – the police pr guy (which I think is Strath Gordon now) gets up on TV and says “this incident was highly regrettable – but it shouldnt reflect on the force… and we will be thoroughly investigating it”.

    Football clubs have one of those pr guys as well for when the footballers go crazy.

    Now the banks need a pr guy.

  35. rog
    July 26th, 2009 at 10:07 | #35

    Markets are either free or they are not, there are no shades of grey so when you talk about “controlling the system” you are restricting its ability to freely “automatically adjust”

  36. Ernestine Gross
    July 26th, 2009 at 10:08 | #36

    Ikonoclast @17. Yes.

  37. July 26th, 2009 at 10:43 | #37

    Alice,
    But that was the point I made all the way up the thread – the banks did not want it. They were not consulted before the government brought it in. It was unneeded and just a simple panic by the banking neophytes currently in government.
    As you said up the thread, in direct contradiction of what you say here,

    The banks may not have wanted the guarantees but I did and so did countless others and I might have formed part of a bank run – people WERE talking about it at the time of the crisis and after, ie what to do with their savings, which banks were safe etc.”

    No wonder you seem to agree with them – you have managed to take positions on both sides of this discussion. At least you are consistent in one thing: your failure to understand banking. The ad hom that accompanies it is also a little bit rich – but I am used to it.

  38. Alice
    July 26th, 2009 at 11:27 | #38

    Andy – you are entirely missing the point. At the time of the crisis I was relieved to have the bank guarantee (along with thousands of ordinary Joe savers). Under financial system stability why would we want it? It was the circumstances Andy and the circumstances changed. Different financial circumstances generate different needs from Joe saver. That is not a contradiction.

  39. paul walter
    July 26th, 2009 at 12:29 | #39

    Sorry Alice, Andrew Reynolds and the like, often paid think-tank Sophists, take my breath away with the absolute brazeness of their attempts to defend the interests of their oligarchs, at the expense of everyone else.
    They even try to weasel word an accusation of “wanting it both ways” away from the real source; themselves and their clients, back onto those who see thru and point out the rort and its injustice.
    Actually the banks can plunder, but never cough up for us ( forclose, more like! ), but if they fail, and thru their own greed, selfishness and laziness we (collectively) have to cough up $trillions in corporate welfare, supplematary to our own losses including thru the consequences of resulting recession: note the tens of $trillions lifted world-wide from the system by tame politicians in cahoots with the oligarchs, while hundreds of millions of humanity globally are driven deeper into poverty.

  40. July 26th, 2009 at 13:18 | #40

    The reason that deposits were guaranteed was simply to avoid any possibility, however slight, of the collapse of the financial system, including, very importantly, the payments system, which in turn would have brought the entire economy undone. At the time the government acted there was no time to consider long winded academic arguments about moral hazard etc. What was needed was action and as a result we can all argue about what happened, but not from the economic rubble of the nation, but from lofty positions which may well have been saved as a consequence of the guarantee. Maybe not, but where would you rather be?

    The payments system (the mechanism by which you, me, corporations, including banks, governments both domestic and international, exchange value for our labor, goods and services) can collapse if confidence in those institutions central to the system (ADIs) is lost. The analogy is the ship at sea, perfectly safe until all passengers rush to one side and it capsizes. A bank run is similar. I take my savings out, not because I know for certain that the bank is unsafe, I just don’t want to be the last man in the queue. When I say I take my savings out I mean everyone, including other banks and businesses that, against their better judgment start to question the wisdom of depositing their income. Once that gets out of control, and it can happen extremely quickly, then it is very hard to get back on an even keel. Someone suggested that simply increasing interest rates would have encouraged depositors to stay. So if you see all the passengers taking to the lifeboats you would stay on board if the captain offered you a cheaper fare?

    About zero rate deposits and loans. A zero rate deposit is a deposit which matches the inflation rate. The real deposit rate at any one time is the quoted rate less the inflation rate.

    As the economy is still intact we can all piously debate the idea of a guarantee of deposits – an argument that long predates the recent financial crisis. What the current situation has done is demonstrate that when the chips are down the payments system must be preserved and you must do that well before any panic sets in.

    But what to do now? One thing is for certain, there is no “foolproof” one size fits all solution that will guarantee that drastic government intervention is never again required. The danger of such nirvana type ideas is that when they fail the bang is a very big one because everyone is surprised. Re-regulation back to the pre 1980s environment is not the answer, unless you want to strangle the economy. Self regulation is laughable and expect the banks, through the ABA, to resist everything. And BIS? They have a lot more work to do.

  41. Donald Oats
    July 26th, 2009 at 14:02 | #41

    In the UK there were long queues of people wanting to withdraw their savings because of the increased probability of bank collapse. Just like a bubble popping, the very act of withdrawing money may accelerate the increasing probability of collapse; people sense this and respond accordingly by scooting down to the local queue, and hoping like crazy that they aren’t standing behind the last person in the queue who is able to get their cash out. [That magic person is always the one in front of me, whatever the queue is for: checkouts at the local supermarket running out of money, or having to sort out a "special" offer for an aggrieved customer for 15 minutes - and then closing the checkout, the last seat at the movies, the final ticket to the music gig, and so on.]

    Once the run is on, it is damn hard to put the Jini back in the bottle. I think our current government was correct to respond when they did.

  42. Alice
    July 26th, 2009 at 16:11 | #42

    Of course they were Don.

  43. Ernestine Gross
    July 26th, 2009 at 20:13 | #43

    Deposit insurance. I have a question addressed to all knowledgeable commentators on this blog.

    As I understand it, ‘successful’ deposit insurance (ie one that can be relied upon) presupposes the sequentially complete markets (spanning).

    I’d appreciate an authoritative reference to theoretical result which contradict my understanding.

    Empirical. JQ referred to a discussion with Ian Harper regarding the German system. To recall, deposit insurance is only a first call in this system in the sense that if one of the many small banks gets into trouble then the private deposit insurance is first port of call. Then there are case by case negotiations on a State level, if applicable, and then there is the Federal Government. Such a system is consistent with the assumption that markets are not complete – as I understand it (and I would be very happy to revise my understanding). I JQ’s post, it was mentioned that the German system is not transferable to Australia because of the ‘small’ number of banks (ie a smaller economy).

  44. July 26th, 2009 at 20:39 | #44

    Perhaps, EG, for the non-economists amongst us, you could link to a good definition on sequentially complete markets?

  45. Alice
    July 26th, 2009 at 20:53 | #45

    Ernestine – Id like to be able to help BUT I am struggling really really struggling with how to get a time trend variable in OLS for deciles of income against other independent variables (I need this time trend variable and I have no idea what it is or where you get it) and have only just rudimentarily learned GretL because its free. If I had half your empirical understanding Id be a happy woman but someone here should be able to answer your question (its not Andy or me, thats obvious).

  46. Ernestine Gross
    July 26th, 2009 at 21:02 | #46

    Andrew R., I am asking for professional (economics) advice in this case. I don’t wish to obstruct or be difficult. I am asking for your patience to get advice first.

    An important reference is:
    Kreps, David M & Wilson, Robert, 1982. “Sequential Equilibria,” Econometrica, Econometric Society, vol. 50(4), pages 863-94, July. [Downloadable!] (restricted)

    I noticed the authors have a down-loadable working paper on this topic from 2003:

    David M Kreps & Robert Wilson, 2003. “Sequential Equilibrium,” Levine’s Working Paper Archive 618897000000000813, UCLA Department of Economics. [Downloadable!]

  47. Ernestine Gross
    July 26th, 2009 at 21:07 | #47

    Alice and “All”, I apologise for not having specified the subject area a little more explicitly in relation to ‘knowledgeable’.

    I would appreciate advice on my question in #43

  48. July 26th, 2009 at 21:32 | #48

    I would suggest that technical economic analysis of deposit insurance should be preceded by an understanding of the mundane facts. In Germany it’s pretty simple; in the face of a financial storm (October 2008) the government simply stated that regardless of existing arrangements no depositor was at risk, i.e., all deposits would be ultimately fully guaranteed by the government.

  49. Ernestine Gross
    July 27th, 2009 at 09:21 | #49

    No, damien morris, it wasn’t quite as mundane as you make it out to be. There was a considerable time interval during which depositors weren’t at all sure what was going to happen. Further, there were very lengthy negotiations about State Banks, such as the Bayerische Landes Bank and its relationship with the Sparkasse(n).

    Facts in the area of financial markets are observable after the regulatory environment has been decided upon. Lists of so-called facts don’t help to make decisions, not even in mundane areas such as watching a football match. Without expectations (which entails theorising) watching a football match might be the most boring thing to do. People watch football matches. And those who do, aren’t just interested in the ‘fact’, ie the outcome.

    My question still stands.

  50. July 27th, 2009 at 11:22 | #50

    Ernestine Gross. The point I was trying to make was in the context of the financial crisis in that the decision last October was not made after exhaustive economic analysis. On the contrary it has been described as a “frantic effort” to calm fears. The events of the last two years appear to indicate that partial deposit insurance is not sufficient to avoid panic in a serious financial crisis.

  51. Ernestine Gross
    July 27th, 2009 at 12:16 | #51

    Damien Morris, I concur with your last sentence. My reading of the institutional arrangements in Germany is that it is accepted by policy makers that only partial deposit insurance is possible (to cater for non-systemic risk)and this is based, at least in part, on the advice of the Board of Economic Advisers. (I happen to know for sure that these advisers include non-verbal theorists, ie math economists and for those people my terminology in #43 is meaningful).

    I don’t doubt that there have been verbal descriptions such as “frantic effort”. But these words don’t tell me much (because the choice of adjectives is not the issue for me).

    My question in #43 is unchanged.

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