Guest post by Richard Berner, Executive-in-Residence (Center for Global Economy and Business) and Adjunct Professor, NYU Stern School of Business
America faces two interrelated long-term challenges: rising longevity and inadequate retirement saving. The combination of declining private, defined-benefit pension plans and concerns about the viability of federal entitlements has intensified these challenges. While the economic recovery has raised confidence about retirement resources at the margin (see here), workers and retirees remain concerned about how they will meet future basic expenses, medical needs or the cost of long-term care.
Those developments mean that achieving saving goals increasingly must rely on individuals’ thrift and intelligent, efficient investing. Tax-advantaged vehicles that encourage saving (like 401k and IRA accounts), and efficient investment vehicles like mutual funds that follow market-wide stock price indexes are cornerstones of that system.
Yet, some scholars of industrial organization claim that collective investment vehicles―mutual funds, exchange-traded funds (ETFs), and the like―involve “common ownership” that results in softened competition by the firms included in their portfolios (see here, here and here). And, key antitrust enforcers, like the European Competition Commissioner, are looking carefully at this issue. In this post, I argue that the evidence for a causal link between the rise of collective investment vehicles and diminished competition is weak, and far from sufficient to justify interventions that would diminish the attractiveness of these saving mechanisms…. Read More
Many features of our financial system—institutions like banks and insurance companies, as well as the configuration of securities markets—are a consequence of legal conventions (the rules about property rights and taxes) and the costs associated with obtaining and verifying information. When we teach money and banking, three concepts are key to understanding the structure of finance: adverse selection, moral hazard, and free riding. The first two arise from asymmetric information, either before (adverse selection) or after (moral hazard) making a financial arrangement (see our earlier primers here and here).
This primer is about the third concept: free riding. Free riding is tied to the concept of a public good, so we start there. Then, we offer three examples where free riding plays a key role in the organization of finance: credit ratings; schemes like the Madoff scandal; and efforts to secure financial stability more broadly.... Read More
Dear Mr. Quarles,
Congratulations on your nomination as the first Vice Chairman for Supervision on the Board of Governors of the Federal Reserve System. We are pleased that President Trump has chosen someone so qualified, and we are equally pleased that you are willing to serve.
Assuming everything goes according to plan, you will be assuming your position just as we mark the 10th anniversary of the start of the global financial crisis. As a direct consequence of numerous reforms, the U.S. financial system—both institutions and markets—is meaningfully stronger than it was in 2007. Among many other things, today banks finance a larger portion of their lending with equity, devote more of their portfolios to high-quality, liquid assets, and clear a large fraction of derivatives through central counterparties.
That said, in our view, the system is not yet strong enough. In your new role, it will be your job to continue to fortify the financial system to make it sufficiently resilient.
With that task in mind, we humbly propose some key agenda items for the first few years of your term in office. We divide our suggestions into five broad categories (admittedly with significant overlap): capital and communications, stress testing, too big to fail, resolution, and regulation by economic function.... Read More