Analysis of problems in banking sector

What’s Inside America’s Banks? - Frank Partnoy and Jesse Eisinger - The Atlantic

Some four years after the 2008 financial crisis, public trust in banks is as low as ever. Sophisticated investors describe big banks as “black boxes” that may still be concealing enormous risks—the sort that could again take down the economy. A close investigation of a supposedly conservative bank’s financial records uncovers the reason for these fears—and points the way toward urgent reforms.

An essay that is definitely worth the time.

Total debt comparison: US vs Japan

Here's a chart of the ratio of US total credit market debt to GDP, a classic exponential trend breakdown:

Here's a similar chart for Japan:

It's remarkable how in Japan government debt has substituted for private debt; the reason for this is the government has been cushioning the credit crunch implied by falling private debt.

US population concentrations

What is most striking about this map is the vast empty areas.

Investing in technological progress leads to increased economic growth

Paul Krugman writes, in Is Growth Over? - NYTimes.com

that

" Smart machines may make higher GDP possible, but also reduce the demand for people — including smart people. So we could be looking at a society that grows ever richer, but in which all the gains in wealth accrue to whoever owns the robots."

Dean Baker responds, in
Capital Biased Technological Progress; It Doesn't Just Happen | Beat the Press

"Krugman discusses the case where there is an exogenous change in the nature of technology that makes capital relatively more productive than labor. This leads to more capital being used, driving up its price, and less labor being used, driving down its price (i.e. wages)."

"the fact that we may appear to be seeing capital-biased technological progress should not be viewed as just some unfortunate event in the world that we have to learn to cope with. If we are in fact seeing capital-biased technological progress it is almost certainly the case that it is at least in part the result of policy decisions that could be handled differently"

I can see innovation shrinking employment, but the owners of the innovations theoretically would get the marginal wealth. Otherwise there'd be no point to the innovation. Raising tax rates on unearned income to the same as those of labor income would help a lot with the resulting inequality of wealth distribution.. This would be a policy decision that offsets the policy decisions mentioned by Baker.

A retrospective look at Japan's banking crisis

I recently stumbled across a research paper by Richard Koo titled "Japan's disposal of bad loans: failure or success?"

The thesis of this analysis is that Japanese monetary/fiscal authorities handled their post bubble banking crisis relatively well compared to how the US has handled its banking crisis which began in 2008.  The paper contains a lot of good data so it is worth the time even if you disagree with Koo's conclusions.

However, it looks like Koo is defining "success" as a fourteen year recessionary period.

The problem I have with this Koo analysis is with its conclusion is that Japanese monetary/fiscal authorities did mostly the right things.  The paper shows that the Japanese equivalent of the FDIC's Deposit Insurance Fund was in a negative balance from 1996 to 2008. This implies that it could still be in a negative balance now.  If your deposit insurance fund is negative, that's not "success".


In Japan much of the banks' bad loans were simply shifted into government debt.


Koo posits the concept that the US is handling its banking crisis differently when in fact the US is doing the same things that Japan has done.