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Sunday 10 January, 2010

reduce the size of those rents

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guarantees (or the expectation of bail-outs in times of crisis) has reduced the cost of capital and thus increased returns. The high level of rents extracted by the industry may have self-reinforcing aspects, too. The rents translate into high salaries for employees, encouraging the brightest graduates to join the industry and devise more complex products to gain even higher rents (and to find new ways around regulations). The industry's profitability allows it to gain political influence, either through the funding of candidates or via the desire of governments to protect taxpaying businesses. All this helps explain why finance grew too big for its boots, even if it is impossible to put a figure on the scale of its overexpansion. Government bail-outs have also prevented the industry from shrinking as much as it might have. Such intervention means that it is now too late to insist on a purely free-market solution. And the scale of the rescue packages means that finance should pay some price. Governments cannot guess what the right size of the industry should be. But higher capital ratios would protect the taxpayer from future bank failures and limit the industry's profitability, while transparency might reduce the size of those rents.

News for Friday 08 January, 2010