This is what depression era politics looks like

As I’ve mentioned before, for the past several years I’ve been working as a sell-side macro strategist in the banking world. All this means is that I help clients of the bank I work for to better understand the financial markets and make good investment decisions.

Oftentimes the most stimulating aspect of the job entails having broad conversations with clients about the global economy, given that what happens on that level weighs so heavily on the price of pretty much every financial asset. Right now there is a clear sense of pessimistic resignation among most of the clients I speak to, as more and more of the investment community comes to grips with the frustrating reality of the post-crisis economy. Europe and Japan appear to be dealing with a perennial threat of deflation. China is, at best, gradually slowing from its previously unsustainable pace of growth. Even the US, a relative shining light among developed country economies in recent years, is struggling with stagnating wages, especially for the poor and the middle class. Though few think to use the term, I personally think the period we’re in now may be classified by future economic historians as a global depression, one milder than what we experienced in the 1930s, but with the same features of sluggish demand and weak growth and inflation for years on end.

Lately these conversations have steered towards the question: How do we get ourselves out of this mess? There are no easy answers. That’s mostly because, like many things in life, the technical solutions are relatively straight forward, but the social and political backdrop makes those solutions essentially impossible.

To take an example, since the crisis in 2008, central banks have pulled out all the stops in an effort to boost growth and prevent inflation from turning negative. The first step was to cut their key interest rates in an effort to encourage investment and spending. But eventually many central banks hit zero or close to it, and the conventional wisdom was that banks’ target interest rates couldn’t go negative. So a number of central banks tried pulling other levers, given that cutting rates alone wasn’t doing the job, only to find that even this mix of policies wasn’t enough. Now policy makers are debating whether or not to cut interest rates deep into negative territory, an uncharted policy territory which may finally ward off deflation and kickstart the economy, but may also risk destabilizing banks and making the whole problem worse.

You get the point. There is a sense of desperation on the part of many of the officials around the globe in charge of monetary policy. Their bullets have essentially been fired, their caches emptied. And now they are scrambling for whatever other flotsam and jetsam they can throw at the problem.

So what is the solution when the usefulness of monetary policy is all but exhausted? For most of the clients I speak to (and I would agree), it’s fiscal expansion. As the argument goes, if loose money policies aren’t enough to get demand going, then maybe some combination of cutting taxes and increasing government spending should be next. Most economists see this as reasonable; these policies would increase debt levels, but then again, so would lackluster growth in a scenario in which we tried nothing. And besides, rather than expressing concern about too much debt, markets these days are practically begging governments to borrow and spend more; at the time of writing, Japan — a country with a debt level double its GDP — can borrow at negative interest rates going out ten years.

Here is the point: Politics makes a badly-needed policy intervention such as this one essentially impossible. As economic outcomes stagnate — unemployment remains high, real wages fall, etc. — democracies don’t tend to sway towards loosening the fiscal reins. Canada under its new prime minister, Justin Trudeau, is a notable exception to this. But it is very much an exception. In Europe, the UK, and the US, major political movements have emerged urging governments to tighten their belts, rather than let loose. You can blame part of this phenomenon on the preferences of very wealthy individuals with disproportionate political power, who might push policy away from anything that risks expanding the size of the state or making the tax code more progressive. But I’m convinced this isn’t the whole story. The concepts of belt-tightening and “making due in tough times” are easily understood by the typical democratic voter; the concept of a fiscal multiplier for economic output is not. So when economies face those tough times, politicians can signal their credibility, trustworthiness, and discipline by extolling the virtues of fiscal modesty and “pulling ourselves up by the bootstraps”. That such austerity actually drives an ailing economy further into the abyss is seen only as a minor nuisance along the road to political victory.

As if this reality — that politics seems intrinsically biased towards pulling back on the fiscal  reins at exactly the wrong moment — wasn’t depressing enough, the case of migration gives us another example. As I discussed in a recent post, all developed economies need some influx of workers, including the unskilled. The cases of Europe and Japan are especially dire; as the working age population shrinks in these places, generating demand and fighting deflation become considerably more difficult. Yet, the common response within democratic societies during bad times is to restrict the inflow of workers rather than expanding it, as we commonly rush to point the finger at immigrants and other foreign governments for our economic problems. Europe is nearly fracturing over this issue as swaths of Syrian and other refugees flood into the continent. Despite the continent’s desperate need for more young workers, it is abundantly clear how the European electorate feels about immigration. From the UK’s flirtation with exiting the European Union, to Germany’s recent regional election results, to the multitude of countries within the EU openly challenging its principle of free movement, the writing is on the wall. Here in the US the situation is somewhat similar, even as our population issues are less dire. It’s not a coincidence that both major American parties now feel more emboldened to rail against globalization and free trade, and that one particular party’s front runner has made building walls between us and them — in quite literal terms — the flagship idea of his campaign.*

Things are getting particularly scary, I think, because people are slowly coming around to the reality that democracy lacks built-in mechanisms to deal with these phenomena. A lot of investors had this feeling, as did I, in mid-2011 when a handful of US politicians nearly crashed the world economy by refusing to allow a rise in the nation’s technical debt ceiling. This near-catastrophe was brought together by a match made in hell: voters who didn’t understand the debt ceiling concept, wrongfully assuming it to be associated with government profligacy using the simple logic of “more debt equals bad”; and politicians eager to capitalize on this misunderstanding, willing to vote for economic calamity in an effort to ingratiate them to their constituents. The crisis was averted at the last minute, but the episode sent a chilling message: There truly are no adults in charge.

Our current economic challenges are creating a similar dynamic, but one that is much more permanent in nature. After a generation of stagnant wages and nearly a decade of post-crisis economic malaise, voters are understandably mad as hell, with that anger now able to be sharpened into a devastating weapon in an era of instant communication and ubiquitous social media. In previous eras, perhaps, business elites and captains of industry might have been able to rein in this type of destructive populism. That effort is very much in full force this time around, in both the US and Europe, but this time voters don’t seem so easily pacified. How could they, after so many years of failed economic promises that seemed only to line the pockets and strengthen the influence of the wealthy and powerful? To suggest that elites must now wrest democratic control from the angry mobs now seems laughably na├»ve at best, and suspiciously nefarious at worst.

Now more than ever, the combination of dishonest, opportunistic politicians; poorly-educated, apathetic, and easily distracted voters; and a feckless, click-baiting press threatens to render democracies powerless to solve their most urgent problems, and the issue of the economy is now serving as a perfect illustration. There is no Superman swooping in to deliver us to safety, no handsome and charismatic politician who promises to make it better, if only we might give him our vote. The solution will take something deeper, a personal and moral accounting on the part of every citizen, as we decide what kind of voters we want to be, what kind of elected officials we deserve, and what kind of journalists we entrust with the truth. That is, it requires an honest look in the mirror on the part of all of us about the ruptures in the democratic fabric and the personal efforts we must all make to repair them. Otherwise, years from now we may look back at this moment as the good times, when the cynical spiral of economics and politics was just getting underway.


*Turning more protectionist towards trade or restricting immigration isn’t necessarily a cyclical economic issue the way fiscal policy is. The point is that to avoid long-term stagnation related to an aging population and a shrinking workforce, Europe and Japan need more young people coming from foreign countries, not fewer.

Marriage, inequality, and the social partitioning of America


At my first job out of college, one of my coworkers told an unforgettable anecdote about a research project he once worked on as a student. At the time he was helping an economist study marriage patterns across the US, and they needed to understand how marriage laws differed by state. So my coworker went to the library, approached the librarian, and had the following exchange:

Research assistant: “Hi. I need to find out the minimum legal age of marriage in each US state. Can you help me?”

Librarian: [Long pause, stares back suspiciously.] “She’s too young for you.”

I bring this up because a) I find this story hilarious, and b) it illustrates that economists have long been curious about how marriage patterns impact economic outcomes. A NY Times blog post from a while back summarized some of the recent research on this, specifically with a focus on income inequality. The way we commonly choose a marriage partner, it turns out, could be playing a significant role in America’s growing income divide.

From the article:

These days, an investment banker may marry another investment banker rather than a high school sweetheart, or a lawyer will marry another lawyer, or a prestigious client, rather than a secretary. Whether measured in terms of income or education, there are more so-called power couples today than in the past, one manifestation of a phenomenon known as assortative mating, or more generally the pairing of like with like…

Money and talent become clustered in high-powered, two-earner families determined to do everything possible to advance the interests of their children…

The numbers show that assortative mating really matters. One study indicated that combined family decisions on assortative mating, divorce and female labor supply accounted for about one-third of the increase in income inequality from 1960 to 2005.

This was a shock to me when I read it. Income inequality in the United States is at its worst in nearly a century. Most people seem aware of this, but how we get married is rarely one of the reasons cited for the trend. Instead, it’s the usual mix of globalization, technology, and union decline that most use to explain the growing chasm between the haves and have-nots. On occasion, smart economists highlight deliberate government actions over the past few decades, like cutting taxes on investment income or relaxing bank regulations, for the explosion of incomes at the top. But social dynamics aren’t usually part of the discussion.

Nonetheless, the finding that marriage can have such significant implications for inequality makes a great deal of sense to me personally. Back when my wife and I were new parents living in a mostly middle class Connecticut city, we had many late night, anxious conversations about the mediocre schools in our town on the one hand and the area’s stratospheric cost of private education on the other. Southern Connecticut, it turns out, is like a souped-up microcosm of America in that regard; public institutions are under fiscal pressure just like everywhere else, relegating the kids of blue collar native-born Americans and first generation immigrants to middling schools, while the area’s bankers, executives and hedge fund managers drive up the cost of living, from houses to school tuition to haircuts. As kids clump together in socially and economically-segregated schools, they’re more likely to interact with and marry those just as privileged as they are, deepening the inequality gap over generations.

What’s the solution to this vicious cycle? First, public policy can make a huge difference by improving the quality of public schools, such that rich, talented parents actually want to send their kids there, and that those kids might mix socially with their less privileged peers. As I understand it, this was a key ingredient in the post-WWII economy, one characterized by stable growth and low inequality; good public education during that time not only produced talent and raised the economy’s productivity, but it also helped maintain a flat society.

But as in many cases, public policy can’t do the job on its own. Solving a social problem as weighty and challenging as this one requires individuals and families to change how they live and interact with others. As I wrote recently on the subject of race, it’s not good enough to have character and integrity in a vacuum. If you want the issue of racism in America to improve, we will have to seek out friends, coworkers, and family members of different races, and consciously include them in our personal lives.

So it is when it comes to class and social status. Given that these days we so commonly live in sequestered little communities where our neighbors have similar incomes and similar education levels, if we actually care about the societal implications of runaway social and economic segregation in America, we can’t just sit there and wait for a solution to descend from heaven. To get out of our comfort zones and to “forcibly agitate” our lives, in the language of that aforementioned blog post, might be the only way to break the cycle.

This takes a radical change in how we live, but on an even more basic level, a major shift in how we view other human beings. Abdul-Baha, for one, asks no less of us than this:

See ye no strangers; rather see all men as friends, for love and unity come hard when ye fix your gaze on otherness. And in this new and wondrous age, the Holy Writings say that we must be at one with every people… they are not strangers, but in the family; not aliens, but friends, and to be treated as such.

That’s not easy, of course. But what’s the alternative? The problem of growing inequality and the deepening stratification of society won’t fix itself. Politicians and bureaucrats can’t be absolved of responsibility. Then again, neither can we.

The dirty secret behind Europe’s migrant crisis

I’m not sure exactly how to feel about Europe’s migrant crisis, whereby 1.4 million individuals fleeing war or economic calamity are expected to seek refuge within the continent by the end of next year. It’s been startling, to put it mildly, to read about the risks some of these people took to escape their home countries, and the catastrophes that some of them have experienced. But beyond that, I hope and pray that the crisis forces a dialogue about the massive movement of human beings around the globe that will need to occur over the next several decades.

To illustrate what I mean, take a look at the chart below. It shows UN population projections in developing (i.e. “poor”) countries next to those in developed (“rich”) countries over the next century. I lump in China with the rich countries for two reasons: one is that China, though still poor by most measures, is rapidly converging towards being developed; and the other is that it’s facing the same potential slow-motion population disaster as places like Europe and Japan, thanks in large part to its one-child policy.

As you can see, the rich world is basically facing an epic storm of receding population levels, an issue that is destined to become more and more noticeable in our lifetime. As population growth turns negative in these countries and as their populations age, it will put huge pressure on fiscal budgets — think of all the money the government must come up with to pay pensions to an aging population, in the face of a shrinking pool of income tax payers. It also exacerbates the problem of sluggish aggregate demand and deflation, already a major issue in places like Japan and Europe.

So the rich world already has a need for young, able-bodied workers, and will likely need more and more of them in the years ahead. Guess what? There are huge numbers of such people in the developing world, ready to pack up and come work in the rich countries, often for wages you and I find substandard but which represent a giant leap forward from the developing country status quo. And it’s likely that as developing country populations explode, and especially as issues like climate change destroy living conditions in many of these — more Syrias, in other words — there will be even more workers from poor countries looking for new places to live.

Meanwhile, economists have long highlighted the enormous gains to poor country residents from just small increases in international labor mobility. An oft-cited study on the economic implications for poor country residents immigrating to the United States, for instance, estimated a four-fold increase in real wages for the typical worker. But freer labor mobility should not be seen as an issue of charity. In reality, developed economies will soon become as desperate for young people to come in as today’s refugees currently are to get out.

So rich countries need workers, while poor countries have too many. The question is, Will this transaction actually take place? The economic case is unmistakably clear; without expanding their labor forces through immigration, rich countries are headed for a slow-motion economic train wreck. The stumbling block is not scientific evidence but pure, good-old-fashioned prejudice. We all see the need for more workers in places like Germany, Japan, and America. Let’s be real: We just don’t feel comfortable with them being Turkish, Indonesian, or Mexican.

This is why seemingly squishy, airy-fairy ideas such as “loving thy neighbor” and “universal brotherhood” are so important and potentially powerful. The tar of prejudice is so thick that whole societies would rather commit the equivalent of economic suicide than let brown-shaded, funny-accented people to join their nations. World unity is not some utopian ideal; it’s a matter of economic survival.

As Shoghi Effendi put it nearly 80 years ago:

The anarchy inherent in state sovereignty is moving towards a climax. A world, growing to maturity, must abandon this fetish, recognize the oneness and wholeness of human relationships, and establish once for all the machinery that can best incarnate this fundamental principle of its life.

The problem is daunting, but the solution is simple. Only stubborn prejudice and fear stand in the way.

Am I just another dumb consumer?

Sale mannequins

My wife recently passed along a clever Atlantic article entitled “The 11 ways that consumers are horrible at math”, focusing on some of the mental mistakes that we tend to make in our economic decisions and how vulnerable we are to the influence of marketing. In true Atlantic fashion, it introduces no real new insight, but does a good job summarizing and explaining some of the existing research. Here’s a snippet:

(5) We do what we’re told. Behavioral economists love experimenting in schools, where they’ve found that shining a light on fruit and placing a salad bar in the way of the candy makes kids eat more fruit and salad. But adults are equally susceptible to these simple games. Savvy restaurants, for example, design their menus to draw our eyes to the most profitable items by things as simple as pictures and boxes. Good rule of thumb: If you see a course on the menu that’s highlighted, boxed, illustrated, or paired with a really expensive item, it’s probably a high-margin product that the restaurant hopes you’ll see and consider.

As the paragraph above mentions, the influence of “framing” on individuals’ decisions can be powerful. That’s just one of many ways that we fail to even come close to performing rationally in our routine economic decisions (if we were perfectly rational, the framing effect would be nil), a point I’ve made on this blog many times in the past. Yet the passage above also contains another important point: framing and other strategies can be used for things we commonly think of as bad (like pushing restaurant goers towards higher-priced items), or for things we find good (like getting school kids to eat healthier foods).

This is the whole idea behind the recently conceived concept of “libertarian paternalism“, championed by Richard Thaler and Cass Sunstein and popularized by their book, Nudge. Thaler and Sunstein are keen to argue that while it’s wrong to force people into a particular decision that would benefit everyone, we can still “nudge” them with certain mental tricks. Organ donation is the classic example; most everyone agrees that the decision on whether or not to donate one’s organs should the individual’s own and never the government’s, yet the evidence suggests a country’s default setting — ie starting everyone out as donors and giving them the freedom to opt out rather than the other way around — has a huge impact on how frequently people actually participate. You can “nudge” people to be organ donors, that is, without forcing them or even providing any real incentives.

I’m a big supporter of libertarian paternalism, even though I think the term is a misnomer (it’s much more paternalistic than libertarian, if you ask me). I think it’s important to acknowledge its limits, though. Proponents of policy-led “nudges” or other public interventions are coming from the angle that since we humans do not behave consistently rationally and that markets are inherently imperfect, public policy can identify and fill in the gaps wherever markets fail.

That second part about the power of public policy is a fantasy. First, it’s technically tricky (figuring out exactly how much to spend on government-led efforts to encourage kids to eat vegetables, for instance). But secondly, government simply doesn’t have the firepower to offset all the purposeful “bad” nudging that private industry pumps out.

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This nation is built on trust and self-serve fountain beverages

A couple weekends ago I sat down with my laptop in a Panera where we live. I had a little bit of work to take care of, and Panera is my default choice to get stuff done. The wi-fi is free, the food is decent by casual dining/fast food standards, and you can get your tea or coffee in an actual mug rather than a paper cup (a rare treat). And the one I go to tends to have plenty of seats and never be overcrowded.

In any case, this particular visit got me thinking about something extremely important: fountain sodas. Usually when I visit places like this, I go for tap water instead of something sweet. I love soda and all, but for lunch I don’t really like paying the extra $2-3 for something I probably consume too much of anyway. At Panera, the way this works is that they give you an annoyingly small clear plastic cup that is completely different looking from the cup you get when you buy a fountain drink, and then allow you to fill this cup with water on your own at the fountain soda area.

I find that a lot of these casual chain do this now; that is, they give you a water-specific cup rather than one usually intended for a fountain drink. I suppose part of the reason is to encourage people to buy drinks rather than asking for free water with their meals, given that you can only fit what seems like 0.8 ounces of liquid inside one of those tiny cups.

But another reason, I guess, is the idea that having different-looking cups would make it harder for the soda free loader types, the ones who ask for a free cup only to fill it up with something they were supposed to have paid for, simply because it would be more obvious when someone’s dumping Cherry Coke into a cup that’s clearly intended for water. That seems to be the thought process at Chipotle, which gives the same size cup for water as it does for soda, but slaps an mistakable label on their water cups to make it perfectly clear what’s what.


The Chipotle water cup: yup, pretty clearly for water

The whole point of this is that there’s a clear element of trust involved here. Even with those simple deterrences in place to prevent people from stealing soda from fast food joints, it’s not like doing so is hard. We’re not talking Ocean’s Eleven here. In fact, at that particular Panera that I mentioned at the beginning of this post, the fountain drink area is way in the back, where no one at the front counter can see. Really, the only way to get busted is for some employee to pass by your table and spot you, and then of course to decide that, despite being exhausted and probably making just above minimum wage, it’s worth publicly shaming a customer into what cost the Panera shareholders about ten cents. In other words: not gonna happen.

But think to yourself: When was the last time you pulled off this sneaky trick, despite how easy it would be? Continue reading

Is kindness economically efficient?

When I was a sophomore in college my microeconomics professor talked about gift giving as an example of an economically inefficient cultural practice. The lesson of the day was on how human beings efficiently allocate their resources. When we have the freedom to choose exactly how to spend our money, economic theory tells us, then we can maximize our own personal well-being. But when given a gift, some of this freedom is removed; in efficiency terms, it would be much better just to give cash and let the recipient figure out on his or her own how to spend it.

There was one important caveat: As my professor put it, when two people exchange a gift there are some “warm fuzzies” involved, a benefit that we can’t easily quantify. It’s one thing to go out and get what you want, but it’s particularly special and heartwarming when a loved one is thoughtful enough to get it for you. On a related note, let me digress for a moment and offer some free advice to all men reading this: Don’t ever give your wife or girlfriend cash as a gift, no matter how big an econ nerd you think you are. You run the risk of injury, death, or worse.

For whatever reason, recently I’ve been hyper-sensitive to all the subtle ways that economic efficiency and basic humanity butt heads, just as is the case when it comes to gift giving. And when it comes to this subject, the example that keeps smacking me in the face is my morning commute to work.

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Survey data confirms: It really stinks being poor

Pew Research recently came out with a fascinating study across a number of countries asking individuals about life satisfaction. The results are pretty interesting, and I’d recommend taking a look at the summary here.


One of the most intriguing charts that Pew presents (see above) is a scatter plot of countries, with average rating of life satisfaction on one axis and per capita GDP on the other. Not surprisingly, there’s a positive correlation between income and satisfaction, meaning that people in wealthier countries tend to be more satisfied with their lives than people in poorer countries. But we also see that the very wealthy countries (like the United States) aren’t significantly more satisfied than the middle-of-the-pack countries, echoing previous research on this topic. In fact, the country that rates highest in terms of life satisfaction is Mexico, where per capita GDP is about $10,000 per year, roughly a fifth that of the US.

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What’s missing from the conversation on income inequality?

Income inequality is a hot topic these days here in the US, and for good reason: over the past generation or so, real gains in income for those at the bottom and middle of the spectrum have been practically nil, while those at the top (especially the very top) have risen rapidly. As a consequence, income inequality by some measures is at its highest levels since the 1920s.


If income inequality has been rising for so long, why is it only recently getting so much attention? I think the main reason for the recent attention was the housing bust and financial crisis in 2008 (duh), which provided a shocking contrast between widespread home foreclosures and mass layoffs on the one hand, and generous bank bailouts on the other. But since then, we’ve had plenty of other things to keep our attention on the subject. I’m thinking the Occupy Wall Street/99% movement; the 2012 Presidential election, which forced a national dialogue on the subject; and the near-celebrity status of economist Emmanuel Saez, whose recent book has attracted huge media attention.

Within that debate, economists continue to fuss over a longstanding question: Sure, inequality is rising, but what does that mean for economic growth? Do societies in which the rich take a bigger and bigger slice find it more difficult to grow the whole pie over time?

The Washington Center for Equitable Growth has a new paper summarizing the research, both old and new, on exactly this topic. It’s a good read even if you’re not into economics, especially the overview section, which gives some nice context for this question. Among the report’s conclusions are:

Most research shows that, in the long term, inequality is negatively related to economic growth and that countries with less disparity and a larger middle class boast stronger and more stable growth. Some studies do suggest that in the short run, inequality may spur growth before hindering it over the longer term, but overall there is growing evidence that, in the long run, more equitable societies are associated with higher rates of growth.

It’s always important to differentiate between positive and normative questions in economics, and this subject is no exception. The former asks something about how the world is; the latter, how the world should be. Economists like to focus most of their time on positive issues: Does inequality constrain growth? That is an important question, and researchers and organizations which focus purely on answering it objectively and honestly are doing very important work. Nonetheless, what seems to be missing from today’s debate about inequality is a second, more normative question: If the economy continues to grow while remaining very unequal (or becoming more unequal), is that ok?

For two reasons, I’d say the answer is No (surprise!). The first reason has to do with economic theory. The second has to do with the very purpose of our lives as human beings. Continue reading

The Entourage theory of financial management


Am I the only one that misses Entourage? The former HBO series, which closed shop a few years ago after eight seasons, was my escape from the drudgery and boredom of responsible living. Yes, Entourage was over the top, to put it mildly, but so is pretty much everything else on TV. It was at times just plain dumb (the series finale was a hasty tying of years’ worth of plot loose ends), but the show had a lightheartedness and carefree vibe that’s been missing from television ever since.

At the heart of what made Entourage work, of course, was the character of Vincent Chase, loosely based on Mark Wahlberg’s early career (when he was still Markie Mark and doing stuff like this, which some of us refuse to forget). Vince’s is the happy-go-extremely-lucky story we all love to root for: Poor kid from a blue collar town makes it big, achieves fame and fortune, and lives life in the fast lane while never forgetting his true friends or where he came from.

At this point you may be thinking, What does this have to do with finance? I’m glad you asked. (Let’s pretend you asked.) On many occasions in Vince’s fictional life, when he is warned about the imminent possibility of losing it all — by his accountant, his agent, his manager, whoever — he utters some version of the following statement:

What’s the big deal? If I lose all my money I can always go back to Queens. I was happy before when I had nothing. If I have to go back to that, so what?

This is the part in the blog post where I remind myself that Vincent Chase is not a real person (oh yeah). But a part of Vincent Chase lives inside all of us. That’s because we all, in various ways and to varying degrees, practice what I call the “Vincent Chase theory of financial management”. That is, we are all on occasion tempted to “stretch” our money, saving a little less than we probably should towards getting that bigger house, that nicer car, that more glamorous vacation, etc. After all, when times are good and the money’s flowing, why not? We can always go back to the more modest lifestyle we were perfectly happy with before, if the twists and turns of life force us in that direction.

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Financial regulation sounds a whole lot like high school


I finally got around to listening to This American Life’s radio piece about Carmen Segarra and her secret recordings while working for the Federal Reserve Bank of New York. Even if the subject of financial regulation doesn’t typically blow your socks off, I’d highly recommend listening to the podcast, which features TAL’s typically tremendous mix of information and entertainment. At the very least, read the transcript.

The episode is about something called “regulatory capture”, which is a phenomenon we see in a lot of industries, particularly finance and banking. As the piece puts it, regulatory capture is a lot like when there’s “a watchdog who licks the face of an intruder and plays catch with the intruder instead of barking at him”.

Why does this happen? We often point to the “revolving door” separating industry and regulation, where people bounce back and forth between the private sector and the regulatory agencies, dulling their incentive to be tough on the companies they’re regulating now but might work for in the future. But the piece seems to suggest there’s something more purely psychological than that at play.

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