Comments on: Historical Banking Crises and the Rules of the Game http://rufuspollock.org/2009/12/07/historical-banking-crises-and-the-rules-of-the-game/ Wed, 18 Jan 2012 14:17:51 +0000 hourly 1 http://wordpress.org/?v=3.1.4 By: rgrp http://rufuspollock.org/2009/12/07/historical-banking-crises-and-the-rules-of-the-game/comment-page-1/#comment-161930 rgrp Tue, 12 Jan 2010 13:49:21 +0000 http://www.rufuspollock.org/2009/12/07/historical-banking-crises-and-the-rules-of-the-game/#comment-161930 <p>The problem with the safety-net provisions is the one you identify: that it results in "moral-hazard" for banks (and depositors). The banks can take on more risk than they would have done otherwise as that risk isn't just borne by them but also by other participants in the system (whoever is contributing to the deposit insurance fund), and, perhaps more importantly, depositors don't need to monitor banks as closely because the deposits are insured.</p> <p>The second question you raise about the impact of progressive taxation is much more complicated. Obviously, taxation has some negative impact on incentives. However, it provides for public goods, insurance (through health and unemployment provision) and some basic redistribution (there's some, fairly weak evidence, on the relationship of inequality and growth ...). Where a trade-off is made here is necessarily a complex question, and the answer will depend heavily on one's preferences regarding the structure of society as well as one's beliefs on matters such as the role of luck versus effort in life outcomes!</p> The problem with the safety-net provisions is the one you identify: that it results in “moral-hazard” for banks (and depositors). The banks can take on more risk than they would have done otherwise as that risk isn’t just borne by them but also by other participants in the system (whoever is contributing to the deposit insurance fund), and, perhaps more importantly, depositors don’t need to monitor banks as closely because the deposits are insured.

The second question you raise about the impact of progressive taxation is much more complicated. Obviously, taxation has some negative impact on incentives. However, it provides for public goods, insurance (through health and unemployment provision) and some basic redistribution (there’s some, fairly weak evidence, on the relationship of inequality and growth …). Where a trade-off is made here is necessarily a complex question, and the answer will depend heavily on one’s preferences regarding the structure of society as well as one’s beliefs on matters such as the role of luck versus effort in life outcomes!

]]> By: A. Gondring http://rufuspollock.org/2009/12/07/historical-banking-crises-and-the-rules-of-the-game/comment-page-1/#comment-161412 A. Gondring Thu, 24 Dec 2009 17:47:21 +0000 http://www.rufuspollock.org/2009/12/07/historical-banking-crises-and-the-rules-of-the-game/#comment-161412 <p>I'm curious whether the talk went into reasons behind the problem with safety-net provisions other than allowing lenders to "push the envelope" (i.e., use the safety net to take on more total risk, thus keeping their own risk constant). The problem is definitely more than even that very big reason, IMLO (In My Layman's Opinion :-).</p> <p>When I can't afford to responsibly buy a house myself, or build in a geologically unsound area (e.g., New Orleans), etc., why should I be taxed to pay for others to do so? Many of us in the States have realized that there's little incentive to increase income under our progressive tax scheme (which punishes increases in income, keeping us ambitious poor from accumulating wealth). Thus, bank equity (and overall economic well-being) is suppressed...right? </p> <p>I am also curious about reasoning given for the <em>need</em> for a strong central bank under industrialization.</p> <p>As I mentioned, I am not an economist, so please forgive any misuse of technical terms.</p> <p>Thank you.</p> I’m curious whether the talk went into reasons behind the problem with safety-net provisions other than allowing lenders to “push the envelope” (i.e., use the safety net to take on more total risk, thus keeping their own risk constant). The problem is definitely more than even that very big reason, IMLO (In My Layman’s Opinion :-) .

When I can’t afford to responsibly buy a house myself, or build in a geologically unsound area (e.g., New Orleans), etc., why should I be taxed to pay for others to do so? Many of us in the States have realized that there’s little incentive to increase income under our progressive tax scheme (which punishes increases in income, keeping us ambitious poor from accumulating wealth). Thus, bank equity (and overall economic well-being) is suppressed…right?

I am also curious about reasoning given for the need for a strong central bank under industrialization.

As I mentioned, I am not an economist, so please forgive any misuse of technical terms.

Thank you.

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