ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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London Interbank Offered Rate

The London Interbank Offered Rate was designed for "wellfunctioning"markets that exist for the vast majority of time, and not for periods of extreme stress where the interbank market disappears or when reporting higher borrowing costs leads to even higher borrowing costs.These are the fundamental problems with Libor that need to be solved. Even if they are solved, Libor has suffered a substantial dent to its credibility.

Euro's Salvation

The euro's salvation lies in a little less Europe in fi scal and regulatory policy, not more.

India Dimmed

agree to a fiscal pact in December 2011 India Dimmed and to support a Greek restructuring plan gave the European Central Bank (ECB) cover to ignore the intentions of its Avinash Persaud founding fathers and act as a lender of When you are in a country suffering a decline of confi dence, a drying up of international capital flows and a weakening currency, its citizens tend to place all blame on the government. This is not entirely unfair. Even if the government is not directly to blame and even though confidence is a fickle thing, who else should take responsibility? The reality, though, is that external factors often play a role too and a change in the flows could also trigger a change in domestic confi dence. Few commentators like to dwell on that. They far prefer the delicious exercise of pointing fingers at local politicians and gossiping about the fate of Rahul and Priyanka Gandhi.

Taxing the Financial Sector

 Taxing the Financial Sector Avinash Persaud On Wednesday, 28 September, the European Commission (EC) proposed a European Union (EU)-wide 0.1% tax on bond and equity transactions and 0.01% on derivative transactions between financial firms to support European countries in crisis. This is not very dissimilar to the taxation in India on share transactions, but Cassandras in Europe and elsewhere will shout that it is another crazy idea from European leaders that will presage financial Armageddon, or at the very least, destroy liquidity, tax consumers not bankers and hinder the extension of finance to the poor and needy. In truth, this tax is more feasible than many would have us think, and like all taxes can be set well or badly and if set well, could bring several benefits. India too should widen its financial transactions tax (FTT) to include fixed-income and derivative instruments. Bankers would like us to think that you have to be a little crazy to support financial transactions taxes yet it is an idea with excellent pedigree. John Maynard Keynes proposed it in General Theory no less. Nobel laureate James Tobin followed suit in 1971 amid the wreckage of the Bretton Woods system of pegged but adjustable exchange rates. In 2009, the chairman of the United Kingdom

Debt Swap: A Solution for Greece's Problems

What Greece needs is a debt swap which would lower interest payments to affordable levels and free up resources critical to support economic activity.

A Systemic Approach to Systemic Risk

As India officials look at the international debate on "too-bigto- fail" issues they should reflect on the more general problem that while there is now universal familiarity with the words systemic risks, systemic resilience and macro-prudential action, there is precious little agreement on their meaning. To make the financial system safe we need to shift the focus away from an obsession with the component parts, and focus more on the system as a whole and how we can make it work as a system that transfers risk from places with limited capacity for those risks to other places with greater capacity.

A Keynesian Moment? Hardly

One cannot argue that the high unemployment today in the advanced economies calls for a Keynesian solution. Unlike the 1930s, which were characterised by high unemployment and large savings, it is hard to argue, yet, that unemployment now is stuck at a permanently high plateau and that we are in a prolonged slump. More importantly, we are not here as a result of persistently high savings in the high unemployment countries.

In Defence of Complexity

That complex financial derivatives lay at the root of the financial crisis is a seductive but wrong idea. When liabilities are complex assets cannot be simple, otherwise we will have a mismatch between the two. The problem is not with the nature of derivatives but of the incentives. Financial regulators need to concentrate on incentives that reduce the build-up of lending in a boom, irrespective of the precise instrument of leverage.

A Critique of Current Proposals to Reform Financial Regulation

The notion that in reforming the financial system we should concentrate our efforts on making sure that banks are not "too big to fail" is based on an illusion. What we are looking for is regulation that makes the financial system less sensitive to error in the estimate of risk, not more so. There are two ways to do this. The first is to observe that this error is strongly correlated to the boom-bust cycle; counter-cyclical capital requirements will be part of this approach. Another way is to limit the flow of risks to institutions with a structural capacity for holding that risk.

A Different Approach to Financial Regulation

Prevention of future crises calls for not just more regulation per se, but better regulation - in particular, regulation with a greater macro-prudential orientation. Macro-prudential regulation concerns itself with the stability of the financial system as a whole. By contrast, micro-prudential regulation, consisting of such measures as the certification of those working in the financial sector and rules on how financial institutions operate, concerns itself with the stability of individual entities and the protection of individuals.

A Radical Proposal to Reform Governance of International Financial Institutions

The road to greater legitimacy for the International Monetary Fund and the World Bank does not lie merely through greater "democracy". Both the creditors and debtors of these international financial institutions need to have a greater say. A proposal to have two categories of shareholders, one of stakeholders and the other the creditors, the latter a group of countries that has hitherto not been given its due at the international financial institutions.

Do Not Be Distracted by Mr Madoff

Financial crashes do not occur randomly, but generally follow booms. Through a number of avenues, sometimes regulatory, sometimes not, though often in the name of risk-sensitivity, sophistication and modernity, the impact of current market prices on behaviour has increased. This increased use of market prices has increased the endogeneity of financial market risks. In the economic up-cycle, pricebased measures of asset values rise, price-based measures of risk fall and competition to grow bank profits increases. A critical component of the policy response to crisis should be for bank regulation to act as a countervailing force to the natural decline in measured risks in a boom and the subsequent rise in measured risks in the subsequent collapse.

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