Banking for those unwilling to bank

While we worry about the unbanked population that faces significant costs for trivial transactions, there is also a not insignificant share of the population that is unwilling to have bank accounts for religious reasons. Islam and some strands of Christianity forbid the use of interest. Islamic banking has emerged in response and is offering deposit accounts that do not provide interest, but shares in the bank's profits. If this becomes more commonplace this could have important implications for how we think about banking, regulation and systemic risk in this sector.

Cagri Kumru and Saran Sarntisart show that if such a sizable population exists, then it is welfare improving to have an alternative banking system in place. It seems kind of obvious that it would be a loss to society not to capture these savings for growth-enhancing loans. The paper also shows that this alternative banking sector would emerge endogenously. The market forces are thus doing the right thing. What we need to be careful about is how to adjust the regulatory framework to not mess things up unnecessarily. And I see no reason why we should resist the emergence of such a banking sector.

Give Me Your Tired, Your Poor, and Your Economists, Too

Click here to read my column in Sunday's NY Times.

And what if the Fed were to make a loss?

Whether you think the Fed's actions have been successful or not in pulling the US out of a deeper recession, you have to admit that the gigantic increase in its balance sheet has been hugely profitable. US$88,900,000,000.00 last year. US$79,300,000,000.00 the year before. Despite what conspiracy theorists want to believe, this money is not going into the pockets of private bankers, but to the US Treasury, which is coming to rely on it in these trying budgetary times.

But these profits are not going to last forever. When the economy is going to do better, interest rates will have to be brought to saner, normal levels. And this is going to happen by selling the assets the Fed has accumulated, and this is going to happen at a loss, a substantial loss. Who is going to pay for it. Indeed, the Fed is not provisioning for losses, first because it never made a loss, second possibly because the law may prevent it from doing so. So if it makes a loss, what is going to happen? I could just print money to cover it, but that would run counter the very policy it is trying to implement. Or the US Treasury could cover the losses. I am not quite sure that it stands ready to do so. And in such a circumstance, conspiracy theorists would have a field day.

I have not seen anybody mention anything about the exit strategy of the Fed. So this is all personal conjecture. Am I missing something? The only positive aspect I see in this is that this seems to be an interesting revenue smoothing mechanism for the government. Or, once more, the Fed doing fiscal policy instead on the government.

Value of gold: is this time really different?

Why is gold valued? is year in year out one of the most visited posts on this blog. For some reason that I still cannot fathom people care a lot about the value of gold. The fact that is does not have much fundamental value except for what people believe it is worth makes it almost as much a fiat currency as the money doom sayers want it to replace. Another repeated myth about gold is that its value is stable or can only go up, despite the fact that there have been some spectacular drops. Like now, where people claim that this time it is different, gold is the best refuge in the face of a major meltdown of various currencies. Or at least as a hedge against pending inflation.

Claude Erb and Campbell Harvey explore the role of gold as a hedge against inflation. It turns out gold is a very poor hedge, and if it were, it should be at half its current price. I guess this over-reaction can be attributed to herd-behavior, which nowhere as common as for gold. And with the real price of gold at twice the long term average, and the fact that mean reversion invariably kicks in, sooner or later the price is going to go significantly down. Always has, always will. This time is no different.

If gold has a useful property, it is a very good hedge against inflation in the very long run. We are talking centuries here. Erb and Harvey compare the pay of Roman and US soldiers in gold and find that they are remarkably similar. But this means also that gold does not have returns that are in any way comparable to equity. We are taking here about returns that are a small fraction of a percent. Hardly a good investment. Also, gold is no good currency hedge either, as its fluctuations are so big that they drown out the fluctuations in exchange rates. Etc. Erb and Harvey go through a series of other arguments why gold should be held, and none seems to hold water. But gold is shiny.

The minimum wage under deflation

Whether the minimum wage is a good tool for poverty alleviation remains controversial. Still, it has proven politically impossible to reduce the minimum wage, which means that the only way to reduce its bite is to wait for inflation to eat the real minimum wage away, if this is you want. A minimum wage that is deemed to be too high then gradually gets back to an appropriate level. Of course, this assumes that there is positive inflation. What if there is deflation?

Ryo Kambayashi, Daiji Kawaguchi, and Ken Yamada look at Japan that has been characterized by some prolonged deflationary episodes. They look at the period from 1994 to 2003, where the cumulative inflation reached a whooping -0.5% (CPI) or 3-5% (median wages), a bit unfortunate that the sample for which wage data was available just happens to have little deflation to show. But the nominal minimum wage, which is set regionally, looks from the graphs to increase by about 12%, thus there is still a change in relative wages, like what could be seen in some other countries. The authors then find that the lower tail of wages is compressed, especially for women where half of this effect is attributable to job loss. This is not inconsistent with other studies.

An economist breaks up with his girlfriend

...when it is the utility-maximizing thing to do.

Are Google Ads Racially Biased?

Chapter 19 of my favorite textbook has a case study on research establishing that resumes with names more common in the black community get less response from employers than resumes with names more common in the white community.  Today's Boston Globe has a related article about the results you get when you google a person.