Tuesday, August 17, 2010

Recent Readings II

I had to change the readings I planned. Now I'm reading for the second time Alan Greenspan's book along with the 2009 interviews of the Region (the Minneapolis Fed´s magazine). I have to say that the former Fed Chairman is not among my favorite policy economists. The book however, is quite enjoyable and has the narrative of very interesting moments in both the economic history of the U.S. and the personal development of Greenspan's thoughts.

There is one particular paragraph that has caught my attention. If you look at chapter 6 “The Fall of the Wall“, towards the end, you'd find the following: “Black markets, with their unregulated prices and open competition, seemingly replicate what goes on in a market economy. But only in part. They are not supported by te rule of law. There is no right to own and dispose property backed up by the enforcement power of the state. There are no laws of contract or bancruptcy, and no opportunity to take disputes to court resolution.“

While reading this paragraph, is hard not to think about countries with a weak power of the law. Particularly thinking of Mexico, it seems like the end of our Revolution War provided with weak institutions for the foundation of free markets. At present, Mexico fits -sadly- the paragraph above with ever larger black markets for all kinds pf goods and with citizens defenseless against monopolies, mobs and criminals. The bancruptcy part is an important one, as is presented in the top of the list of reasons why comercial banks lend so little and focus on making profits with charges for other uses of the payment system.

From the reading of the Rajan´s interview in the link above, another idea that would be worthy of exploring is the fact that fierce competition among banks in the U.S. caused instability in the system. This would be so because competition forces banks to look for alternative investments in order to keep up the profit rates they present to their shareholders. This is a partial view of course, the set up given by regulation is also to blame for reckless lending and investment, the idea however remains interesting. Mexico has had a less-than-competitive financial system that is endlessly "consolidating" for over a decade, and the claim that competition should be enhanced has been in the top of the priorities of the policy makers. Now, in light of Rajan's comments, should they still push for more competition accepting a tradeoff with stability? Further thinking is needed.