Archive for June 2nd, 2008

Political Economy of Financial Development

June 2, 2008

It is remarkable that no matter how much you read there are academics whose work you have been missing along. The reading list keeps expanding.

I came across this paper by Stephen Haber of Stanford and was simply amazed. Haber is an expert on political economy of financial development. HE simply asks if finance is important for growth, why don’t governments build efficient financial systems? His view:

It is difficult to bring about broad based financial devleopment in absence of political reforms that enhance democratic governance

He provides a framework where let us imagine there are 3 agents in an economy:

1. incumbent financiers – has accumulated finance
2. politicians – runs government machinery
3. industry – needs credit to expand

He goes on to show that markets do not develop as the interest of all 3 cannot be aligned. 

1. incumbent financiers: want to maintain its rents and create barrier to entry. Thus prefers high cost of credit
2. Politicians: need banks to channelise taxes, loans etc
3. Industry- needs low cost credit

Between 1 & 2 there is a obvious problem of aligning their incentives. 2 wanst lost cost credit and competitition and 1 opposes it.  Haber goes on to explain the problem of alignemnt between each and hence, it is difficult to push reforms in financial sector. A fantastic perspective. Highly recommended reading.

The paper reminded me of another superb paper by Rajan & Zingales which looks at underdevelopment from very similar angle.

Credit default swaps: What if they default?

June 2, 2008

I have been writing on this market quite regularly ( see CDO mess continues, Settlement problems surface in CDO markets ).

I wrote a piece for Financial Express on the same topic (The surname is printing error). The articles draws heavily from my research on the subject. In the FE article I have updated the fugures as per the recent BIS data release.

Assorted Links

June 2, 2008

1. WSJ Blog points inflation expectations are rising. Econbrowser also has some commenrs.

2. WSJ Blog summarises comments by Geithner on the crisis

3. Econbrowser on whether commodoty futures have led to a rise in price levels

4. Mankiw points to how to better mortage business practices

5. Ajay Shah on Bear Stearns’ last days. Fin Prof also points to an article on Bear Stearns

6. FIn Rounds points to a blog on I-Banking

7. A new blog on infrastructure focusing on India

8. PIB on driving cars and irrationality

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