The origins of depression.... and regulating financial institutions
I am lagging a bit in my reading of the Economist but I finally went through last week's on the plane today. Fantastic, as always - this is truly my only must-have magazine - but the reason I'm referring to it today is a column in the science section that was fascinating. Empirically, that is, based on my own experience, this idea about the engine of depression (the mental, not financial, kind) holds a lot of water.
The other thing I want to write a few words about is an idea that hit me on the plane as well about a neat way to think about regulation of financial markets. I won't go too deeply into the terminology, but it seems to me that a neat way to make sure that banks stay both competitive but still enjoy healthy franchise profits (thus keeping them conservative) is to borrow a concept from my favorite hobby, "german" or "euro" board games.
Indeed, pretty much all good eurogames include several "catch the leader" mechanisms. In board games, the idea is that if someone opens a big lead too quickly, the system is designed to make it more difficult for them to maintain this lead, thus keeping the game close. Well, as counterintuitive as it might sounds, this concept has tremendously appealing applications in the financial arena, and in any commercial arena in fact. In other words, if regulation is designed to incentivize innovation when a firm is still small but growing, but make it harder to keep growing beyond a certain size (for example, by enforcing stricter oversight and implementing higher capital requirements), we will in one fell swoop both encourage competition (which benefits the consumer), protect franchise profits (since the bigger banks will still be able to enjoy their position without worrying about their peers growing bigger still), AND remove most of the systemic risk that really large institutions create (since banks will find it harder to grow beyond a certain size).
The beauty of this is that the implementation is truly simple; I listed a couple of mechnisms above but with about half a dozen in total, we can achieve something that seems akin to a miracle - more or less free-market capitalism that encourages innovation and competition with much reduced (and eventually eliminated) systemic and bubble risk.
The other thing I want to write a few words about is an idea that hit me on the plane as well about a neat way to think about regulation of financial markets. I won't go too deeply into the terminology, but it seems to me that a neat way to make sure that banks stay both competitive but still enjoy healthy franchise profits (thus keeping them conservative) is to borrow a concept from my favorite hobby, "german" or "euro" board games.
Indeed, pretty much all good eurogames include several "catch the leader" mechanisms. In board games, the idea is that if someone opens a big lead too quickly, the system is designed to make it more difficult for them to maintain this lead, thus keeping the game close. Well, as counterintuitive as it might sounds, this concept has tremendously appealing applications in the financial arena, and in any commercial arena in fact. In other words, if regulation is designed to incentivize innovation when a firm is still small but growing, but make it harder to keep growing beyond a certain size (for example, by enforcing stricter oversight and implementing higher capital requirements), we will in one fell swoop both encourage competition (which benefits the consumer), protect franchise profits (since the bigger banks will still be able to enjoy their position without worrying about their peers growing bigger still), AND remove most of the systemic risk that really large institutions create (since banks will find it harder to grow beyond a certain size).
The beauty of this is that the implementation is truly simple; I listed a couple of mechnisms above but with about half a dozen in total, we can achieve something that seems akin to a miracle - more or less free-market capitalism that encourages innovation and competition with much reduced (and eventually eliminated) systemic and bubble risk.
posted by Blinkered at 10:15 AM
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