Posts tagged with: banking

MoneyRoll

Note: This is the latest entry in the Acton blog series, “What Christians Should Know About Economics.” For other entries in the series see this post.

The Term: Money

What it Means: In economics, money is a broad term that refers to any financial instrument that can fulfill the functions of money (more on that in a moment).

There are three basic ways to exchange goods and services: gifting (e.g., I give you a banana, expecting nothing in return); barter (e.g., I give you a banana, in exchange you give me an apple); by using money (e.g., I give you a banana, in exchange you give me $1). Money was invented (and reinvented in every culture) because it makes exchanges easier than the barter system.

What Money Is: Money is a shared belief system used to simplify exchanges of goods and services. To be used as money people have to share a belief that the item —whether paper, gold, rocks, etc. — can perform three main functions: be a store of value, be used as a unit of account, and serve as a medium of exchange.

In the next section we’ll examine these functions. For now, here are two examples of how money serves as a shared belief system:
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I ran across this video yesterday (courtesy of ESA), which I thought presented some interesting challenges and issues:

The video was presented on Upworthy as an example of something “all white people could do to make the world a better place,” that is, use their white privilege to address injustices.

A number of economists, including Milton Friedman and Thomas Sowell, have written about the power of the market economy to overcome racism and discrimination, to put people into relationships on the basis of economic decision-making rather than skin color. As Friedman contended,

the preserves of discrimination in any society are the areas that are most monopolistic in character, whereas discrimination against groups of particular color or religion is least in those areas where there is the greatest freedom of competition.

But as a conversation I had with some others about the video also illustrates, there are times when (at least in the short run interests of the firm), something like profiling can seem to make some economic sense. The successful passing of one bad check can really hurt a store’s margins. Practically speaking the stores often take a complete loss.
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Acton Institute is once again offering a free ebook; this time, Banking, Justice and the Common Good. From now until May 5, 2012 at 3 a.m. EST, you can click on this link and download the monograph for free.

We’d appreciate your comments and thoughts on the book. When you’ve finished, please go to the Amazon page for the book and leave a review.

Blog author: dpahman
posted by on Wednesday, November 23, 2011

In a recent BBC article, Sean Coughlan reports a novel idea from Oxford academic Will Crouch,

He argues that someone becoming an investment banker could create sufficient wealth to make philanthropic donations that could make a bigger difference than someone choosing to work in a “moral” career such as an aid charity.

Indeed, there seems to be an ever increasing suspicion, even among Christians, that certain career paths are per se more moral than others. However, as Fr. Robert Sirico writes in The Entrepreneurial Vocation,

Every person created in the image of God has been given certain natural abilities that God desires to be cultivated and treated as good gifts. If the gift happens to be an inclination for business, stock trading, or investment banking, the religious community should not condemn the person merely on account of his or her profession.

This is unfortunate, to say the least. Crouch argues that if more ethically inclined individuals would pursue careers in banking, for example, they would significantly increase the resources at their disposal to help those in need. According to Crouch,

The direct benefit a single aid worker can produce is limited, whereas the philanthropic banker’s donations might indirectly help 10 times as many people.

Using some basic, ball-park calculations, he estimates that “an ethically inclined banker who donated half their income could save 10,000 lives” throughout their working lifetime. What might be the difference in our neighborhoods, country, and world if more charitably inclined people were open to business related careers? Certainly, it is not everyone’s gift, and there is nothing wrong or deficient about being a social worker, for example, but perhaps there are some who have avoided such a path, such a calling, simply because of an unfair stigma.

Will Crouch offers a different perspective:

We are calling on people to be like Robin Hood, but by earning the money rather than stealing it.

A novel idea, if you ask me.

When the Pontifical Council for Justice and Peace needed an expert economist to assist in articulating the “Note” titled Towards Reforming the International Financial and Monetary Systems in the Context of Global Public Authority to feisty journalists at an Oct. 24 Vatican press conference, it called on the University of Rome “Tor Vergata” economics professor, Leonardo Becchetti.

For an English translation of the professor’s remarks at the Vatican press conference, go to the end of this post.

Prof. Becchetti is a local celebrity of sorts, whose TV time has increased since the outbreak of the global financial crisis and growing cynicism on the future of the European Union. He has provided his expert assessments and criticism to Italian news channels and late night talk show programs, and has become a “go-to guy” when speaking on the relationship of economics to human happiness, central banking and monetary policy. See his interview of the monetary policy and inflation:

[youtube http://www.youtube.com/watch?v=woOyekGo89g]

No doubt, Prof. Becchetti was charged with the very difficult task of articulating and defending some the Note’s bold economic and political prescriptions – usually a “no-fly zone” for Vatican officials. Moreover, in all fairness, Becchetti removed his professor’s hat to his best ability, while speaking in relatively plain language to the journalists, most of whom, like myself, do not hold PhDs in international finance and monetary policy.

What follows is the unofficial English translation (actually my own) of the transcript of Prof. Leonardo Becchetti’s presentation. Becchetti’s technical debriefing on the Note last Monday raised a few eyebrows and provoked some critical thinking on what the Vatican document said (and didn’t say) regarding international financial and monetary reform.

For example the following finer points jumped out when translating Becchetti’s remarks:

1. The logic that a global economy requires global governance seems not quite right. What about the Church’s traditional support of subsidiarity, that is, crises should be resolved at the local level of problem. The financial crisis is a pandemic and will require massive effort to resolve it, but local symptoms and outbreaks of this financial disease are manifest in unique ways from nation to nation. A single global monetary and financial authority might simply enforce a “one-size-fits-all” policy that is not practical in most countries. This logic smacks of the 20th century centralized economic planning that has proven destructive in Eastern Europe.

2. Becchetti’s analogy of the “long spoons” is not sensitive to the fact that, through human innovation, those same klutzy over-sized spoons can be creatively re-invented through human innovation to allow for self-feeding. For me, Becchetti’s long spoon analogy inspires ideas of spoon-feeding each other (i.e. receiving easy hand-outs) and not creative cooperation to resolve our financial crisis. If left to fend for ourselves, it might be a clumsy experience at first, but we will then be forced to find ingenious and independent ways of self-preservation.

3. It is true that our world is increasingly interdependent and this provides great opportunity for international solidarity and cooperation, but why use the term “formidable threat” when addressing the fact that first world job holders are feeling the heat of equally qualified laborers from developing countries? I like the thought that the first world feels the need to compete and intelligently find more efficient ways of production, but Becchetti’s subtle semantics seem to infer that Marxist class struggles are at play in devising a global financial peace plan .

4. Lastly, what evidence is there that a financial transaction tax on stock exchange activity will ease the pain and suffering of today’s struggling businesses and unemployed? How many ways have we tried to tax and redistribute our way to human fulfillment? Is this the missing link in international economic planning? Cannot someone speaking on behalf of the Church and who is an expert in economics and happiness, at least make some sort of plea for greater spiritual wealth and its redistribution (i.e. by becoming fulfilled in Christ evangelizing His Word)?

I am sure you will have more questions yourself. Please feel free to share your own opinions.

Translation of Prof. Leonardo Becchetti’s remarks (original Italian version)

The bright side of the [financial] crisis is that it represents a time of great opportunity.

The global financial crisis is an opportunity to reform the very architecture of the global financial system, strengthen the European Union in terms of harmonizing its fiscal policies, while progressing more swiftly toward a goal of political unity and increasing discipline over national fiscal policies.

The Vatican document focuses on two key issues:

i) Building a set of rules for global governance which, if possible, will be used as a framework [to guide] the actions of global institutions;

ii) Reforming the international financial system with a series of specific proposals.

Concerning point i), global governance is urgently needed to overcome the asymmetry caused by the globalization of markets, institutions and rules that remain predominantly national.

Globalization makes us increasingly interdependent and makes it practically impossible to ignore other countries whose problems once seemed so distant: Simul stabunt simul cadent [Latin for similar things fall together].

To give you a few examples, there are at least six fundamental elements of interdependence between economic and financial systems:

i) the American debt crisis is a problem that concerns not only [the U.S.] itself but savers around the world who have invested in it and in the largest economies, like China, that [in turn] have invested a substantial portion of their own reserves in [U.S.] treasury bonds;

ii) the Greek debt crisis and the likely reduction in the facevalue of this country’s bonds (between 20% and 60%) will result in serious losses on the balance sheets of the French and German banks that had invested in them;

iii) the presence of a huge mass of poor and underprivileged in the world, willing to work at wages much lower than those of our own employees (bearing equal credentials and who are also protected and unionized) is a formidable threat to the maintaining levels of wealth of high-income countries;

iv) exiting from the euro would have damaging effects not only on developing countries but also on Germany itself, which for years has enjoyed the advantage of exporting its goods to markets within the Eurozone without additional costs linked to exchange rates;

v) the coordination of central banks is now increasingly important in a globally integrated world; recently, developing countries have often complained that the expansionary monetary policies of American and European central banks (quantitative easing) have exported inflation into their countries;

vi) for some time now G-20 meetings have tried coordinate the policies of countries with deficits with those with surpluses to encourage the latter to adopt more expansionary policies to boost demand throughout the world.

The [current situation is like] a large table full of guests, each of which is given a very long spoon to eat with. The difference between hell and heaven in this familiar story is that in some guests use their spoons to clumsily and unsuccessfully feed themselves while others use their long spoons to feed each other. It is in the former situation which nation states find themselves in globally integrated markets as they try to pursue their own short-sighted and short-term interests. This becomes counterproductive, because it is only by cooperating with each other that we will be able to put an end to this financial crisis.

On the second point (the rules of financial markets), the document adopts some proposals already launched by the Dodd-Frank legislation in the United States and by the Vickers Commission in the United Kingdom, but which have not yet been implemented and are not in force due to a number of obstacles.

It is fundamental that the world of finance returns to its role of serving the real economy. To do so it is necessary to:

i) reduce the leverage of banks that are “too big to fail” (the disproportionate 30:1 leverageratio between short-term liabilities and long-term assets is among the main causes spreading the subprime crisis throughout the world).

ii) adopt the so-called Volcker Rule which prevents banks from doing proprietary trading with customer deposits.

iii) more severely regulate the trading of derivatives born from insurance instruments. In the real economy insurance policies are purchased when someone owns an actual asset to be insured, while in financial markets this occurs in no more than 5 percent of cases. For this purpose, there is an EU proposal to achieve this objective regarding the credit default swaps of government bonds.

A fourth proposal concerns the instituting of a tax on financial transactions for reasons explained in the following paragraph.

It is important to ask why the position on taxing financial transactions of economists and civil society (a majority EU citizens in fact are in favor) has changed radically in recent years.

Last year, 130 Italian economists signed an appeal in support [of the proposition], which garnered further support with a similar appeal put forth by 1000 economists from 53 countries and delivered to the Finance Ministers of G20 countries attending the 2011 Summit held in Washington, D.C. last April 14-15 (among the prominent signees were highly respected leaders such as Dani Rodrik, Tony Atkinson, Joseph Stiglitz and Jeffrey Sachs) See: http://www.guardian.co.uk/business/2011/apr/13/robin-hood-tax-economists-letter
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There are two reasons for this change of opinion: the events of the global financial crisis and further evidence that has helped to alter some [former] prejudices.

Upon the advent of the global financial crisis, the public finances of some major Western countries have been severely weakened while bailing out banks and, consequently becoming new targets themselves of speculative attacks.

A part of the financial world has thus privatized profits, socialized losses, and then utilized public funds used to bailout those who had come to the rescue in the first place.

It is, therefore, understandable why the majority of public opinion believes that those working in the financial markets should, therefore, help pay for the costs of this crisis, the burden of which has been currently shared by the most vulnerable [taxpayers in society].

From this point of view the FTT responds to the simple demands of justice, which seems urgent, given the most recent current events, in order to maintain social cohesion within the Community.

The second reason for increased favor for such a tax stems from the shedding of prejudice.

Until recently the tax was considered inappropriate and not globally applicable should it involve capital from the country in which it was enforced.

This bias is unfounded, as documented in research conducted by the International Monetary Fund, because there are at least 23 countries today that unilaterally apply a transaction tax (which is none other than a stamp tax) without there ever having been any [from their respective countries]. (See. T. Matheson , Taxing Financial Transactions. Issues and Evidence, IMF WorkingPaper No 11/54, March 2011, 8).

The United Kingdom is the country with the highest tax transaction with the application of its Duty Stamp Tax on one single type of financial asset (0.005% duty on the value of shares owned and listed on the London Stock Exchange).

This tax raises about 5 billion pounds in revenues each year.

By way of this evidence [EU Commission President] Barroso’s proposal to establish such a tax in the EU correctly addresses a “harmonization” of taxes throughout Europe on financial transactions –and not of their first introduction.

The London [Stock Exchange] tax has provided an interesting example of tax avoidance, as some operators have exited the stock market to invest in new OTC derivatives (contracts for differences) which essentially consist of bets on variations in share prices.

It is interesting to note, therefore, that the transaction tax has now split the market into two: those really interested in investing in company shares and those who bet on short-term variations in prices.

Such [tax] avoidance is already implicitly considered in the Barroso proposal, which would extend taxation to derivatives (and thus also to contracts for differences). Such problems can also be countered by banning contracts for differences as is already the case in a major financial market, like the United States.

From a scientific perspective, there are numerous ways to measure the elasticity of volumes of transactions upon introducing such transaction taxes, demonstrating a conservative coefficient rather than supporting the capital hypothesis.

Another reason for why the cannot occur is that a very high frequency of financial operations benefit from being in close proximity to the Stock Exchange’s physical location, where the information is released firsthand electronically. (See: New York Times (2009): Stock Traders Find Speed Pays, in Milliseconds). Moving away from the live center of market operations would mean losing such a [critical time] advantage.

One seemingly unfounded objection is the impact the tax will have is on the overall cost of capital.

To set the rate proposed by the Barroso tax proposal, calculations based on the capitalization models of expected future asset values show that this cost is basically null (See again: Matheson 2011).

The other objection is based on reduced liquidity caused by the tax within markets. This is a matter of opinion. How much cash do we really need? Dean Baker, in his commentary on this issue, says that the tax would spell a return to transaction costs and to the state of liquidity of some ten years ago – that is to say, returning to a period that was far more flourishing than the times we are currently experiencing.

The truth is that there is no solid evidence on the effects of this tax on [total] liquidity, but only a series of different models with opposing results depending on the particular type of microstructure of financial markets and competition models hypothesized by intermediaries.

Summing up the four main objections to the institution of such a tax ([1] the tax cannot be imposed except on a global level, [2] there would be no control over the , [3] the tax significantly increases the overall costs of capital, and [4] the tax reduces market liquidity, they are either are false or unsubstantiated based on factual evidence (the first two) or lack of proof (the latter two).

Regarding the above arguments, the transaction tax (certainly not a panacea for all evil) may just represent an important step in recalibrating the relationship between financial institutions and other reforms that can help to prevent a new financial crises, as advocated by the Dodd Frank legislation [in the U.S.] and the Vickers Commission in the United Kingdom (cf. the Volcker Rule, the deleveraging of “too big to fail” intermediaries, and penalizing capital requirements for riskier investments as opposed to ordinary credit) and the restoration of civil society’s confidence in the financial institutions we so urgently now depend on.

Paul Krugman made the mistake of over-sharing this past weekend when he told CNN’s Fareed Zakaria he thinks that the United States economy would benefit from a military build-up to fight made-up space aliens. He’s been defended as being fed up with Republican obstructionism, being desperate to make a point, or even being wholly and completely correct. He’s entirely wrong though, and his thinking (what there is of it) is an example of the kind of depersonalized economics that has cost this country so much.

You’ve probably seen the video by now. If not, your sides will ache through the rest of this post:

Economics is more than just the manipulation of balance sheets, which is how the hyperinflation trillions-in-stimulus crowd see it. Professor Krugman does not accept that essentially, economic activity is the production of something valuable, and he does not believe that human labor has intrinsic worth, besides its taxability. Therefore what people do does not matter; in fact, if lying to them makes the economy function more smoothly, that’s fine.

This is a vision in which Man has no dignity—in which Man is not made in the image of God or anything else. The study of human interaction, then, is nothing more than moving numbers around on a page, and people are no different than plastic cars to be shifted across a traffic jam board game. (It’s telling that Krugman turns to space aliens to save our economy.) Contrast this view with what the Pope said this morning at World Youth Day.

What does have value? The state, which for progressives like Krugman is the engine of historical progress. Enter Keynsian economics, and this weekend’s gibberish.

Blog author: berndbergmann
posted by on Thursday, April 24, 2008

In the April 24 edition of the Vatican newspaper L’Osservatore Romano, Ettore Gotti Tedeschi focuses on the origins and lessons of the global financial crisis. In a previous article, Gotti Tedeschi argued that the downturn is an opportunity for Italy to reform its economy and cut down on unnecessary public spending.

He now examines what the crisis means for the state of international finance and draws some unusual but noteworthy conclusions. In his view, the principal answer for improving global financial architecture cannot be provided by more government regulation.

Instead, Gotti Tedeschi interprets the crisis as a wake-up call to return to “other rules – older rules which restore the priorities of the banking profession.” These rules of sound economics have been partly eroded by an excessive lowering of interest rates by central banks, inducing other actors to take excessive risks in their financial operations.

The over-stimulation of markets led bankers and business leaders to abandon the path of solid long-term growth in favor of short-term gain: “Too often managers with a poor sense of responsibility have created the illusion of realizing miraculous growth and profitability.” They abandoned the search for “concrete results and above all, long-term sustainability.” His advice is to return “to what is real, responsible and durable.”

He suggests that what is needed is a spiritual refreshment to deepen the understanding of how a successful bank or business is run. This would enable people to resist temporary financial fashions and evaluate real risks and possible gains adequately.

Gotti Tedeschi is in a good position to combine the practical insights of the world of banking with a profound theoretical grasp of business ethics. While he is one of the most well-known bankers in Italy, he has also found the time to write books about the relationship between Christian values and economics.

His advice deserves to be taken seriously. As politicians around the world propose a whole range of new regulation in response to the credit crunch, it must not be forgotten that public authorities provided the markets with cheap money and excessive stimuli. The result was a widely distorted perception of risk and profitability. It would be unfortunate if a period of over-stimulation was followed by a period of over-regulation.

Two weeks ago, French bank Société Générale announced that off-balance sheet speculation by a single “rogue trader” had cost the company 4.9 billion Euros ($7.2 billion). The scandal had enormous repercussions in international markets leading some commentators to decry the rotten nature of global “casino” capitalism and to call for the reversal of financial liberalization. However, the actual circumstances of the case do not justify more government intervention in financial markets but illustrate individual moral failings and poor internal governance on behalf of the bank.

A new report also suggests that a lack of internal controls and weak enforcement of existing rules may be the real source of the problem at one of the oldest banks in France.

On January 24th, Société Générale said that it had discovered a “massive fraud” through “a scheme of elaborate fictitious transactions.” The event caused a great stir not only for the magnitude of the bank’s losses but also because it is partly blamed for the worst European stock market collapse since September 11, 2001.

Jerome Kerviel, who worked as a junior trader in the arbitrage department at Société Générale, was responsible for betting on markets’ future performances. The bank claims that he had made unauthorized and concealed bets of around 50 billion Euros on European markets. According to the New York Times, Mr. Kerviel told prosecutors that his bets would have resulted in a profit of 1.4 billion Euros for the bank if they had been cashed out by the end of December. However, at the start of this year, stock markets experienced a sharp downturn turning the projected profits into losses.

The French bank discovered the bets in mid-January when auditors in the risk management office noticed a series of fictitious trades on its books. Société Générale then conducted a dramatic market sell-off operation in order to neutralize Kerviel’s deals. Traders estimate that the bank unwound contracts in the range of 20 billion to 70 billion Euros from January 21st to 22nd.

Many suspect that selling all these positions into an already volatile European market contributed to the shocking stock market performance in Europe around that time. This in turn, provoked an unexpected and controversial interest rate cut by the Federal Reserve of 0.75 per cent in order to protect the New York Stock Exchange which had been closed on the day when European markets dived. The curious series of events was summed up by a hedge fund manager who told Reuters that: “The real story here is basically, this guy, paid 100,000 Euros a year, sitting in some office at SocGen, forces the Fed to cut interest rates by 75 basis points, which is basically what happened”.

The huge and wide-ranging market repercussions have given ammunition to the critics of financial liberalization. An editorial of the French newspaper Libération sarcastically entitled “Casino” laments that no one controls the huge sums of money moving around in financial markets and demands tighter regulation of financial markets. It also claims that the scandal embarrasses President Sarkozy’s alleged embrace of laissez-faire capitalism. (more…)

Despite strong overall growth, a number of internal problems, including excessive regulation, continue to limit wealth creation throughout Latin America, reports Samuel Gregg. The regulations Dr. Gregg examines include those on starting a business and on banking.

Dr. Gregg explains that while it takes as few as 5 days to file the appropriate paper work to start a business in the United States, it takes an average of 152 days in Brazil. Dr. Gregg states that there are fewer loopholes to starting a business in Iran, than in most of Latin America.

Dr. Gregg also examines, in detail, some of the legacy economic laws that exist in much of Latin America, which regulate banking. These laws, intended to protect people from unjust interest rates, often hurt the people best in the position to increase the economic prosperity of Latin America – namely first-time entrepreneurs who are will to take risks to gain the capital needed into order to create wealth. Dr. Gregg argues that removing some of the regulations mandating interest-rate ceilings would benefit Latin American much more than it helps to protect it.

Read Dr. Gregg’s commentary here.