Archive for June 19th, 2009

Libertarian Paternalism happening in India and US

June 19, 2009

SEBI has passed some major reforms y’day. It was in an overdrive mode last year and is interesting to see some action once again. The idea is to make equity investments  more friendly for investors

  • It has lowered transaction costs across the entire securities trading spectrum,
  • it has floated a concept of anchor investor to make markets more stable (cannot sell share till 30 days of allotment),
  • No shares to have superior voting rights

However, two developments weree really interesting as we see some form of libertarian paternalism (LP) happening:

Rationalisation of disclosure norms for rights issues: Since rights issues are made to existing shareholders, who are in possession of basic information about the company and have been receiving reports regarding major developments in the company on a continuous basis, it has been decided to rationalize disclosures in rights issue offer document by doing away with or modifying existing disclosure requirements.

So, it has done away with disclosures which are repeated in the rights issue prospectus making it easier for investors to read. This is a form of LP where the regulator has intervened making things easier for the investor. The standard regulation approach following classical economics would be let investors decide which info is useful and which is not. However, we know it does not really work that way and SEBI has intervened to make things easier. However, the choice to select whether to invest in the rights share or not remains with the investor (this is what LP is all about).

Another decision:

Transparency in payment of commission to Mutual Fund distributors : There shall be no entry load for the schemes, existing or new, of a Mutual Fund.  The upfront commission to distributors shall be paid by the investor to the distributor directly. The distributors shall disclose the commission, trail or otherwise, received by them for different schemes/ mutual funds which they are distributing or advising the investors.

 This is again a continued form of LP from SEBI. I have bragged in numerous posts how mutual funds in India(see this one, see US case) are actually a distributor’s fund with most benefits going to a distributor than an investor. SEBI has been trying to reform this. It first removed entry load from direct applications, then it asked MFs not to charge entry load in case of bonus units. And now this step which does away with direct loads completely.

However, again it leaves the discretion to investors on how much entry load they want to pay their distributors. This is what LP also suggests- just intervene to kae things better. This means distributors better provide valuable investment advice or he does not get any commissions.

Now in the US. As I mentioned in my last post Obams’ new plan proposes setting a Consumer Financial Protection Agency. This will look into all matters pertaining to regulation in financial products/payments that matter to consumers.

1. Transparency: CFPA will be authorized to require that all disclosures and other communications with consumers be reasonable: balanced in their presentation of benefits, and clear and conspicuous in their identification of costs, penalties, and risks.

2. Simplicity. We propose that the regulator be authorized to define standardsfor “plain vanilla” products that are simpler and have straightforward pricing. The CFPA should be authorized to require all providers and intermediaries to offer these products prominently, alongside whatever other lawful products they choose to offer.

3. Fairness. Where efforts to improve transparency and simplicity prove inadequate to prevent unfair treatment and abuse, we propose that the CFPA be authorized to place tailored restrictions on product terms and provider practices, if the benefits outweigh the costs. Moreover, we propose to authorize the Agency to impose appropriate duties of care on financial intermediaries.

4. Access. The Agency should enforce fair lending laws and the Community Reinvestment Act and otherwise seek to ensure that underserved consumers and communities have access to prudent financial services, lending, and investment.

Just like in SEBI’s case, this one is also a form of LP. As consumers cannot understand financial products, it is better to ask the agency to simplify things for them. US takes a step further and even advocates designing plain vanilla financial products ( I had also advocated the same in my paper) helping people make right choices.

All this would have been completely unthinkable if not this crisis. Though in India’s case the issues are completely different. Indian regulators seem to have taken a liking for findings of behevaioral economics (see this as well) (though am not sure whether SEBI has consciously nudged). I even pointed Fed could be nudging as well.

These are all quite remarkable development I must say. We may not be realising it, but LP is beginning to shape our decisions

Paul Samuelson advice for economists: study economic history

June 19, 2009

Conor Clarke Of Atlantic conducts superb interview of Paul Samuelson, one of the greatest economists of all time. It is two parts.  Part one is here and Part two is here. He discusses about great depression, economic policies then, the current crisis, his secret of being youthful (he is 94 and to remember and answer so many qs is quite remarkable)

The final question was another confirmation to the importance of eco history:

Very last thing. What would you say to someone starting graduate study in economics? Where do you think the big developments in modern macro are going to be, or in the micro foundations of modern macro? Where does it go from here and how does the current crisis change it?

Well, I’d say, and this is probably a change from what I would have said when I was younger: Have a very healthy respect for the study of economic history, because that’s the raw material out of which any of your conjectures or testings will come. And I think the recent period has illustrated that. The governor of the Bank of England seems to have forgotten or not known that there was no bank insurance in England, so when Northern Rock got a run, he was surprised. Well, he shouldn’t have been.

But history doesn’t tell its own story. You’ve got to bring to it all the statistical testings that are possible. And we have a lot more information now than we used to.

So, Samuelson says what host of others have been saying- learn eco history and remember it.  I hope our econ departments are listening and acting. Unfortunately, behavioral economics also tells you people have really short memories. Let’s hope things change.

Columbia B-School Students’ India tour

June 19, 2009

Early this year, a group of 30 students from Columbia Business School participated in a study tour to India, visiting media companies, conglomerates, politicians and government agencies.

They had a essay contest to write about their experiences (they have this every year across countries). The three winners’ essays  are a good quick read. It gives you an account of how students see India. Quite a lot of hope from India.

Don’t policies that lead to stabilization lead to higher growth?

June 19, 2009

Economics is getting so confused these days. So many economics pillars have gone down in this crisis

  • monetary stability implies financial stability
  • central banks independence is crucial to economic growth
  • if a crisis happens, central banks can mop up the mess by plain rate cutting
  • self regulation of firms is the best option etc etc

A bigger list of such issues is summarised here. Visitors are free to add more.

Now comes questioning another pillar – policies that lead to higher stabilization lead to higher growth. Kevin Warsh, Fed Governor in his recent speech says


%d bloggers like this: