Creative Class

Tyler Cowen points to a new NBER study that concludes that the shadow banking system is misnamed: it’s part of the real banking system and at the heart of the financial crisis:

“The ’shadow banking system’ at the heart of the current credit crisis is, in fact, a real banking system – and is vulnerable to a banking panic. Indeed, the events starting in August 2007 are a banking panic. A banking panic is a systemic event because the banking system cannot honor its obligations and is insolvent. Unlike the historical banking panics of the 19th and early 20th centuries, the current banking panic is a wholesale panic, not a retail panic. In the earlier episodes, depositors ran to their banks and demanded cash in exchange for their checking accounts. Unable to meet those demands, the banking system became insolvent. The current panic involved financial firms ‘running’ on other financial firms by not renewing sale and repurchase agreements (repo) or increasing the repo margin (‘haircut’), forcing massive deleveraging, and resulting in the banking system being insolvent. The earlier episodes have many features in common with the current crisis, and examination of history can help understand the current situation and guide thoughts about reform of bank regulation. New regulation can facilitate the functioning of the shadow banking system, making it less vulnerable to panic.”

With GDP falling at a “hefty” 6.1 percent annual clip, Harvard’s Jeff Frankel parses the data:

The previous record-holders were the recessions of 1973-75 and 1981-82, each of them four quarters in length according to the official NBER chronology. In the current downturn, the NBER’s Business Cycle Data Committee determined that the economy peaked in the 4th quarter of 2007…  The NBER also keeps a more precise monthly chronology. The postwar record is 16 months, again shared by the 1973-75 and 1981-82 recessions. To match this monthly benchmark, the current downturn would have to have continued into April. Our best single indicator as to whether it did so will be the employment number to be released by the Bureau of Labor Statistics next Friday, May 8. It almost certainly will show that there were further job losses in April. If so, it will further confirm the dismal conclusion: one would have to go back 80 years, to the disaster of 1929-1933, to find a longer recession.

Government attempts to provide venture capital are, to me, like government subsidies for stadiums. Both are economic development trends that do NOT work, yet simply won’t die.  Check out this NBER Working Paper by James A. Brander, Edward J. Egan, Thomas F. Hellmann (h/t: Alison Kemper):

This paper investigates the relative performance of enterprises backed by
government-sponsored venture capitalists and private venture capitalists. While
previous studies focus mainly on investor returns, this paper focuses on a
broader set of public policy objectives, including value-creation, innovation,
and competition. A number of novel data-collection methods, including
web-crawlers, are used to assemble a near-comprehensive data set of Canadian
venture-capital backed enterprises. The results indicate that enterprises
financed by government-sponsored venture capitalists underperform on a variety
of criteria, including value-creation, as measured by the likelihood and size of
IPOs and M&As, and innovation, as measured by patents. It is important to
understand whether such underperformance arises from a selection effect in which
private venture capitalists have a higher quality threshold for investment than
subsidized venture capitalists, or whether it arises from a treatment effect in
which subsidized venture capitalists crowd out private investment and, in
addition, provide less effective mentoring and other value-added skills. We find
suggestive evidence that crowding out and less effective treatment are problems
associated with government-backed venture capital. While the data does not allow
for a definitive welfare analysis, the results cast some doubt on the
desirability of certain government interventions in the venture capital market.

A new NBER working paper by David Albouy of the University of Michigan takes up “The Unequal Geographic Burden of Federal Taxation” (pointer via Ryan Avent). A look at Albouy’s web-page shows he is doing interesting stuff.

In the United States, workers in cities offering above-average nominal
wages — cities with high productivity, low quality-of-life, or
inefficient housing sectors — pay 30 percent more in federal taxes
than otherwise identical workers in cities offering below-average
wages. According to simulation results, federal taxes lower long-run
employment levels in high-wage areas by 15 percent and land and housing
prices by 25 and 4 percent, leading to locational inefficiencies
costing 0.28 percent of income, or $34 billion in 2005. Indexing taxes
to local wage-levels eliminates these locational inefficiencies. Tax
deductions index taxes partially to local cost-of-living and improve
locational efficiency.

Your thoughts?