Saturday, March 9, 2019

Raghuram Rajan and the Third Pillar by Skyler Myers, Creative Investment Intern, Clemson University

Economists generally focus on interactions between markets and society, but, University of Chicago economist Raghuram Rajan argues that they leave out an immensely important ‘third pillar’ - the smaller, local communities within a market, as opposed to the large metropolitan areas. 

Rajan provides a detailed analysis of the development of Western economies, and attempts to prop up local communities to the same status and importance of the state and market (the other two pillars), while explaining how community was removed from the economy. We tend to rely on the state and market rather than our local communities to solve problems and get things done, which traditionally has not been the case, at the expense of our solidarity. 

The benefits to strengthening local communities are vast, from limiting crony capitalism to preserving democracy by checking the power of the federal government. It is no wonder authoritarian regimes attempt to replace community with other forces like nationalism. A major problem with society, according to Rajan, is the imbalance between the three pillars.

Thursday, March 7, 2019

Low-Income Lending and Investing Opportunities a Priority For Black and Community Banks

An article on, reproduced in part below, noted several key features of HR41.

"On January 3rd, 2019, Bill HR 41, titled “RESCUE Act for Black and Community Banks” was released. It’s stated purpose is 'To provide regulatory relief for Black and community banks, to codify the Minority Bank Deposit Program, and for other purposes.'

The Minority Bank Deposit Program (MBDP) is a voluntary program that encourages credit unions, as well as female and minority-owned banks to become depositories and financial agents for low-income communities. The initiative was created by the US Department of Treasury and is meant to make banking services more accessible to the most underserved communities. 

Although not stated explicitly, 'codifying' the MBDP program could imply the use of a blockchain ledger and smart contract system to record and deploy short-term loans based on a predefined set of rules written in code. Such a system would be a huge boost to communities that are underbanked and often targeted by payday lending services. 

Payday lending is a $40 billion industry that makes its money by preying on those desperate for short-term capital. Loan interest rates can start out at a modest 10-15%, but can easily jump to 300% once borrowers become trapped in a debt cycle of continuous borrowing to keep up with bills and everyday expenses. According to Pew Trusts research, 12million American currently use Payday Lending services, 12% of whom are African Americans. Smart contract based lending would be a highly efficient and cost-effective alternative for both the borrowers and lenders. 

Within the same bill, it mentions (requests) that the Comptroller General of the US...conduct a study on blockchain technology and how it could be used to enable lower-income individuals to invest in start-ups and other crowdfunded companies. 

Crowd investing has long been thought of as a way to give businesses who aren’t a right fit for bank loans or VC capital a chance to raise money while opening opportunities for regular people to grow their wealth through access to more investment opportunities. Blockchain technology would give investors the transparency they need to feel safe about where their money is going, especially if rules were embedded into smart contracts to ensure that funds were only allocated when certain business milestones were achieved."

Friday, March 1, 2019

Monetary Policy and the State of the Economy

On February 27th, The Committee on Financial Services of the US House held a hearing “Monetary Policy and the State of the Economy.” Chairman of the Board of Governors of the Federal Reserve System, Jerome Powell was the only witness. Lanxi He, Research Analyst Intern, Creative Investment. Georgetown University, attended the hearing and provided input for this post.

The Federal Reserve Act (FRA) directs the Chairman of the Fed to testify before the House Committee on Financial Services and the Senate Committee on Banking twice a year. The testimony focuses on the management of monetary policy and its impact on domestic and global economic developments. Each appearance requires the Board submit a Monetary Policy Report.

During this hearing, House members cited China's economic growth and the political allocation of capital. This line of questioning recalled the view of University of Chicago Professor Chang-Tai Hsieh.

On February 25th, The Becker Friedman Institute for Economics (BFI), the Chicago Economics Society (CES), and the Booth Alumni Club of Washington, DC, held a cocktails and a conversation event titled "Crony Capitalism with Chinese Characteristics."

At this event, Professor Hsieh discussed China’s unprecedented economic growth over three decades, stating that this growth has defied economic theory. In Professor Hsieh's view, China has developed a system of "crony capitalism" at the local level that has promoted the development of local businesses.

Chairman Powell stated that the US GDP growth and the unemployment rate were both very close to Fed targets, so there was little likelihood that changes in monetary policy would improve them. He implied there was more risk than benefit in further rate hikes.

House members pointed to bank profits, currently $237.5 billion at last measure, an all time high, as evidence that the banking sector was doing fine and that more of the Fed's attention needed to be placed on income inequality. The Chairman cited job differences in the unemployment rate between rural (higher) and urban (lower) areas as one of the Fed's current concerns, a questionable refocusing given demographic differences between the two areas.

Financial Service Committee members also asked the Chairman about Federal Reserve policy concerning Fannie Mae and Freddie Mac, still under government control. Mr. Powell was noncommittal about policy in this area.

In one of the more interesting developments, Committee Member Rep. Al Green, from Texas's 9th congressional district, requested a study from the Fed on the economic impact of racial and gender discrimination. It is our view that racial and gender discrimination lower aggregate economic output, so reductions in both may lead to an increase in US GDP.