Fault Lines: How Hidden Fractures Still Threaten the World Economy (45 page)

14
See the proposal “An Expedited Resolution Mechanism for Distressed Financial Firms: Regulatory Hybrid Securities,” Council on Foreign Relations,
www.cfr.org/ publication/19002/expedited_resolution_mechanism_for_distressed_financial_firms.html
, April 2009.

15
See A. Kashyap, R. Rajan, and J. Stein, “Rethinking Capital Regulation,” paper prepared for the Federal Reserve Bank of Kansas City symposium “Maintaining Stability in a Changing Financial System,” Jackson Hole, WY, August 21–23, 2008.

16
See Aaron Wildavsky,
Searching for Safety
(New Brunswick, NJ: Transaction Books, 1988).

17
See Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, “Perspectives on the Recent Financial Market Turmoil,” speech at the 2008 Institute of International Finance Membership Meeting, Rio de Janeiro, Brazil, March 5, 2008.

18
See, for example, the proposed House Financial Regulatory Reform Bill of 2009.

19
See Sorkin,
Too Big to Fail,
490.

20
Prime Reserves, a money-market fund, suffered losses on its Lehman debt holdings after the Lehman collapse. Because it paid out $1 for every dollar invested instead of the $0.97 or so that the investments were now worth, investors rushed to the exit to avoid being forced to bear the losses. If the fund had marked its assets to market and paid out only $0.97, there would have been less of a panic. Again, in a crisis, perhaps no asset is safe without a government guarantee, including money-market funds that are invested in anything other than Treasury bills.

21
I thank Viral Acharya for suggesting this term.

22
Louis D. Brandeis to Robert W. Bruere,
Columbia Law Review
31 (1922): 7.

23
Louis D. Brandeis,
Other People’s Money: And How the Bankers Use It
(Washington, DC: National Home Library Foundation, 1933), 62.

1
Alberto Alesina and George-Marios Angeletos, “Corruption, Inequality and Fairness,” working paper, Harvard Institute of Economic Research, Harvard University, 2005.

2
See R. Rajan, “Rent Preservation and the Persistence of Underdevelopment,”
American Economic Journal: Macroeconomics
1, no. 1 (January 2009): 178–218.

3
This section relies extensively on R. Haskin and I. Sawhill,
Creating an Opportunity Society
(Washington, DC: Brookings Institution Press, 2009), and J. Heckman and A. Krueger,
Inequality in America
(Cambridge, MA: MIT Press, 2005).

4
David Barker, “In Utero Programming of Chronic Disease,”
Clinical Science
95, no. 2 (1998): 115–28; David Barker, “Maternal and Fetal Origins of Coronary Heart Disease,”
Journal of Royal College of Physicians
28, no. 6 (1994): 544–51; David Barker, “The Fetal Origins of Adult Hypertension,”
Journal of Hypertension
Supplement 10, no. 7 (1992): S39–44.

5
James Heckman, “Lessons from the Bell Curve,”
Journal of Political Economy
103, no. 5 (1995): 1091–120.

6
Haskins and Sawhill,
Creating an Opportunity Society,
134.

7
See Santiago Levy,
Progress against Poverty: Sustaining Mexico’s Progresa-Oportunidades Program
(Washington, DC: Brookings Institution Press, 2006).

8
James S. Coleman,
Educational Equality of Opportunity,
U.S. Department of Health, Education, and Welfare, 1966.

9
James Heckman, “Schools, Skills, and Synapses,” NBER Working Paper 14064, National Bureau of Economic Research, Cambridge, MA, 2008.

10
Heckman and Krueger,
Inequality in America,
95; S. Bowles and H. Gintis,
Schooling in Capitalist America
(New York: Basic Books, 1976).

11
J. Coleman and T. Hoffer,
Public and Private High Schools
(New York: Basic Books, 1983).

12
See Haskin and Sawhill,
Creating an Opportunity Society,
144–45.

13
Barack Obama, speech at Democratic National Convention, quoted in
Washington Post,
July 27, 2004,
www.washingtonpost.com/wp-dyn/articles/A19751-2004 Jul27.html
.

14
Anthony Bryk, Penny Bender Sebring, Elaine Allensworth, Stuart Luppescu, and John Easton,
Organizing Schools for Improvement: Lessons from Chicago
(Chicago: University of Chicago Press, 2009).

15
Doris Entwisle, Karl Alexander, and Linda Olsen,
Children, Schools, and Inequality
(Boulder, CO: Westview, 1997).

16
Alan Krueger, “Inequality: Too Much of a Good Thing,” in Heckman and Krueger,
Inequality in America
.

17
Much of what follows is based on the report of the Teaching Commission, a private nonpartisan group chaired by Lou Gerstner, former CEO of IBM. Their 2004 report “Teaching at Risk: A Call to Action” can be found at
www.csl.usf.edu/teaching%20at%20risk.pdf
.

18
See Atila Abdulkadiroglu, Joshua Angrist, Susan Dynarski, Thomas Kane, and Parag Pathak, “Accountability and Flexibility in Public Schools: Evidence from Boston’s Charters and Pilots,” NBER Working Paper 15549, National Bureau of Economic Research, Cambridge, MA, 2009.

19
See Sam Dillon “Obama to Seek Sweeping Change in ‘No Child’ Law,”
New York Times,
February 1, 2010.

20
See Haskin and Sawhill,
Creating an Opportunity Society,
149.

21
Ibid., 153.

22
Ibid., 158.

23
This paragraph is based on David Deming and Susan Dynarski, “Into College and Out of Poverty? Policies to Increase the Post-Secondary Attainment of the Poor,” NBER Working Paper 15387, National Bureau of Economic Research, Cambridge, MA, 2009.

24
Susan Dynarski,
The Economics of Student Aid,
NBER Reporter Research Summary 2007, no. 1, National Bureau of Economic Research, Cambridge, MA, 2007.

25
OECD,
Health Data 2008: Statistics and Indicators for 30 Countries
(Paris: Organization for Economic Co-operation and Development, 2008).

26
The peer group consisted of Canada, France, Germany, Japan, Switzerland, and the United Kingdom. See Alan Garber and Jonathan Skinner, “Is American Healthcare Uniquely Inefficient?”
Journal of Economic Perspectives
22, no. 4 (Fall 2008): 27–50.

27
This and the next paragraph rely on Garber and Skinner, “Is American Healthcare Uniquely Inefficient?”

28
Chris Peterson and Rachel Burton,
US Healthcare Spending: Comparison with Other OECD Countries
(Washington, DC: Congressional Research Service, 2007).

29
Andrew Pollack, “Hospitals Look to Nuclear Tool to Fight Cancer,”
New York Times,
December 26, 2007.

30
See Garber and Skinner, “Is American Healthcare Uniquely Inefficient?”

31
Katherine Baicker, Elliott S. Fisher, and Amitabh Chandra, “Malpractice Liability Costs and the Practice of Medicine in the Medicare Program,”
Health Affairs
26, no. 3 (May–June 2007): 841–52.

32
For the highly paid workers in the financial sector, I argue that having a stake in the firm can improve incentives. However, some reasonable portion of their savings should be independent of the health of their firms.

33
See, for instance, Robert Shiller,
The New Financial Order
(Princeton, NJ: Princeton University Press, 2003), 118–19.

34
The next few paragraphs draw on my previous book with Luigi Zingales,
Saving Capitalism from the Capitalists
(Princeton, NJ: Princeton University Press, 2004).

35
Shlomo Benartzi and Richard Thaler, “Save More Tomorrow: Using Behavioral Economics to Increase Employee Savings,” unpublished manuscript, University of Chicago.

1
Bernard Mandeville,
The Fable of the Bees
(1714) (Oxford: Clarendon Press, 1957).

2
Ibid.

3
Yashwant Sinha, speech at World Economic Forum, Davos, Switzerland, January 2001.

4
Jeffry Frieden, “Global Imbalances, National Rebalancing, and the Political Economy of Recovery,” working paper, Council on Foreign Relations, New York, 2009.

5
Ibid.

6
“Leaders’ Statement: The Pittsburgh Summit,” Pittsburgh Summit,
www.pittsburgh summit.gov/mediacenter/129639.htm
, September 25, 2009.

7
M. Goldstein and N. Lardy,
The Future of China’s Exchange Rate Policy
(Washington, DC: Peterson Institute for International Economics, 2009).

8
See Dani Rodrik, “The Real Exchange Rate and Economic Growth,” working paper, Kennedy School of Government, Harvard University, 2008.

9
See George Monbiot, “Keynes Is Innocent: The Toxic Spawn of Bretton Woods Was No Plan of His,”
Guardian,
November 18, 2008.

10
See Eswar S. Prasad, “Is the Chinese Growth Miracle Built to Last?”
China Economic Review
20 (2009): 103–23.

11
Economists will see that I am arguing here that the income effect swamps the substitution effect.

12
See Tarun Khanna and Yasheng Huang, “Can India Overtake China?”
Foreign Policy
(July–August 2003): 75–81.

1
Cited in “Counting Their Blessings,”
Economist,
January 2, 2010.

The index that appeared in the print version of this title was intentionally removed from the e-Book. Please use the search function on your e-Reading device to search for terms of interest. For your reference, the terms that appear in the print index are listed below.

affordable housing mandate

Alesina, Alberto

Alger, Horatio

alpha (excess returns)

Alphatec

American International Group (AIG): bailout of compensation of employees and managers of credit default swaps of customers of financial problems of Financial Products unit of

Angeletos, George-Marios

annuities

antitrust regulations

Argentina: G-20 membership of state-owned enterprises in

Aristotle

arm’s length systems: of employment financial

Asia: economic growth in exchangerate policies in exports of financial crisis of financial systems in foreign debt of governments in recovery from crisissavings in,
See also specific countries

asset-backed securities.
See
mortgage-backed securities

asset prices: departures from fundamentals increases in
See also
housing market

Australia, economic growth of

automobile industry: government

bailouts of in India

Bagehot, Walter

bailouts: of AIG of automobile industry of banks of Fannie Mae and Freddie Mac political consequences of shortcomings of

Bank of America

Bank of Japan

Bank of North Dakota

bankruptcies

banks: bailouts of boards of CEOs of compensation in competition among debt of deposit insurance for deposits in in developing countries failures of financial system roles of lending standards of loans to developing countries by mortgage-backed securities held by

mortgage lending process of off–balance sheet assets of organizational complexity of performance measurement in power of proprietary trading by regional revolving door with government risk exposures of risk managers in rural shareholders of short-term debt of state-owned stock prices of, too systemic to fail transparent structures of
See also
central banks; financialsystems; investment banks; regulationbanking

Barofsky, Neil

Bear Stearns

behavioral economics

Benartzi, Shlomo

benchmarking

Bernanke, Ben

Bloomberg, Michael

bond holders

bonds: covered insurers of
See also
government bonds; interest rates

Brandeis, Louis

Brazil: economic reforms in exchange-rate policies of financial crisis in interest spreads in

brokers, mortgage

Brown, Gordon

bubbles: development of dot-com Federal Reserve policies and in Japan,
See also
housing market

budget deficits, federal

buffers, capital

bureaucracies

Bush, George H. W.

Bush, George W.

Bush (George W.) administration

businesses.
See
firms

business schools

Calomiris, Charles W.

Camdessus, Michel

Canada, health care costs in capital: buffers contingent organizational physical requirements for banks venture
See also
human capital

capitalism: competitive markets in crony, free-enterprise, relationship (managed) self-interest in

Carville, James

Cassano, Joseph

Cayne, James

CDOs.
See
collateralized debt obligations

central banks: Chinese of developing countries objectives of purchases of dollar assets regulatory responsibilities of resources for managing crises
See also Federal Reserve; interest rates; monetary policy

chaebols

Chanos, James

charitable giving

charter schools

children: Chinese one-child policy development of health and nutrition of,
See also
education

Chile, economic growth of

China: consumption in economic growth of energy consumption in exchange-rate intervention by export-led growth strategy of exports of foreign reserves of interest rates in investment in middle class in one-child policy of reforms in savings in state-owned enterprises in

Chrysler

Citigroup: board members of

CEO of off–balance sheet assets of risk managers of risks taken by salaries in stock price of

climate change

Clinton, Bill

Clinton administration

CLOs.
See
collateralized loan obligations

cognitive capture

Cole, Shawn

collateralized debt obligations (CDOs)

collateralized loan obligations (CLOs)

colleges.
See
higher education

Community Reinvestment Act (CRA)

conglomerates

consumption: in China in developing countries discouragement of of energy excess in Japan of middle class political pressure for economic stimulus to in United States

contingent capital

corruption

CRA.
See
Community Reinvestment Act credit: benefits and costs of easy definition of democratization of

credit card debt

credit default swaps

credit markets: access to in developing countries expansion of government intervention in informal microcredit political pressure for easy credit
See also
subprime mortgage market

credit ratings, of mortgage-backed securities

crises.
See
financial crises

crony capitalism

currencies.
See
exchange-rate policies

current-account balances

debt: consumer government household negative views of,
See also
credit markets; foreign debt; mortgages

Defoe, Daniel,
A Plan of the English Commerce

demand: in housing market interest rate levels and in United States,
See also
consumption

democracies

democratization of credit

Dennis, William

deposit insurance

deregulation

developing countries: central banks of consumption in current-account surpluses of

economic growth of excess

savings of exchange-rate policies

of, financial systems of

foreign debt of

foreign

exchange reserves of foreign

investment in microcredit

in organizational capital in

poverty in trade deficits

of trade surpluses of

Dimon, Jamie

disability payments

dot-com bubble

Douthat, Ross

early developers

earthquake, Haitian

earthquake insurance

East Asia.
See
Asia;
specific countries

East India Company

economic growth: of developing countries financial sector role in global policy coordination for of industrial countries of late developers moderated fluctuations in monetary policy and
See also
export-led growth strategies; recessions

economists: debates on credit access

failings of technology used

education: accountability class sizes distance early childhood family influences and formal human capital formation improving quality of increased attainment rates inequality in intrinsic worth of No Child Left Behind Act ongoing parental choice quality of relationship to incomes school year lengths student performance of teachers teaching quality technology in,
See also
higher education

efficient markets hypothesis

elevator ladies

Elizabeth I, Queen

Embraer

Emmanuel, Rahm

employment: Federal Reserve policies and hiring process and jobless recoveries layoffs motivations in on-the-job training political pressure for economic stimulus portable benefits sabbaticals skills needed in technological change and temporary
See also
labor force; unemployment rates

employment benefits.
See
health insurance

energy use

England,
See also
United Kingdom

Enron

environmental sustainability

Europe: covered bonds held by banks firms in,
See also specific countries

European Central Bank

European Union (EU)exchange-rate policies: of Brazil of China of developing countries of India of Japan

expectations hypothesis

export-led growth strategies: of China dependence on foreign consumers, in future of Germany of Japan of late developers managed capitalism and success of transition to balanced economy weaknesses of

exports: of China, of India of Japan, of South Korea of Taiwan,
See also
trade

The Fable of the Bees
(Mandeville) family influences on education and human capital

Fannie Mae (Federal National Mortgage Association): establishment of foreign investors in government takeover of, lending to support housing prices losses of mandate of mortgage-backed securities issued by, reforms of role in subprime crisis