Banking deregulation will be a good thing when pigs fly
How bad are bubbles for welfare?
"If income distribution remains fairly constant". Uh.
Here's the thing: people in the financial industry don't invent innovative financial instruments because they want GDP to increase. They invent them because they want to make piles of money. Said another wayl, they want their country's income distribution to become more unequal, with them getting a bigger share. So if you set them loose, that's what they'll do. The rise in GDP is, for the finance people, an interesting byproduct of their getting rich. Important only insofar as more money sloshing around means more that they can get their hands on.
Then there's the misallocation-of-funds issue, which may be captured by the data the authors are analysing, may not. (In other words, would things have gone better if financial deregulation weren't pushing investment into particular sectors that were most ripe for manipulation.) And there's the fact that they're using historical data on developing countries, where the finance industry arguably wasn't in control of such a huge chunk of the economy as it currently is in the more-developed world. And where bubbles and crashes were contained by the fact that they weren't occuring simultaneously around the globe.
So if your financial industry is pretty small, and there are a lot of other countries that will remain on an even keel while you zoom upwards and then crater, and if you can get your bankers and brokers to do a whole bunch of stuff aimed at earning them piles of money without actually letting them earnbig enough piles to change your country's income distribution, then by all means go for the roller-coaster. Your surviving citizens will thank you for it.
The analysis abstracts from the important issues of poverty and income distribution, which might alter our assessment of past deregulation episodes, but that does not make our analysis less relevant looking forward. . For example, for the type of social welfare function considered here, if income distribution remains fairly constant, one would reach the same pro-deregulation conclusions even if one entirely focused on the welfare of the poor, à la Rawls. This shows that financial deregulation would be desirable under the Rawlsian criterion if one can find suitable social protection mechanisms, and that the effectiveness of those mechanisms should be explored as part of the grand design of new financial regulations - especially before enacting new regulations that would stifle the dynamism of the financial sector.(h/t Ezra)
"If income distribution remains fairly constant". Uh.
Here's the thing: people in the financial industry don't invent innovative financial instruments because they want GDP to increase. They invent them because they want to make piles of money. Said another wayl, they want their country's income distribution to become more unequal, with them getting a bigger share. So if you set them loose, that's what they'll do. The rise in GDP is, for the finance people, an interesting byproduct of their getting rich. Important only insofar as more money sloshing around means more that they can get their hands on.
Then there's the misallocation-of-funds issue, which may be captured by the data the authors are analysing, may not. (In other words, would things have gone better if financial deregulation weren't pushing investment into particular sectors that were most ripe for manipulation.) And there's the fact that they're using historical data on developing countries, where the finance industry arguably wasn't in control of such a huge chunk of the economy as it currently is in the more-developed world. And where bubbles and crashes were contained by the fact that they weren't occuring simultaneously around the globe.
So if your financial industry is pretty small, and there are a lot of other countries that will remain on an even keel while you zoom upwards and then crater, and if you can get your bankers and brokers to do a whole bunch of stuff aimed at earning them piles of money without actually letting them earnbig enough piles to change your country's income distribution, then by all means go for the roller-coaster. Your surviving citizens will thank you for it.
