Andrew Martin has an article in The New York Times on the dynamics of the debit card industry. I don’t have any expert knowledge to add, but here’s the summary: Visa has been increasing its market share by increasing the prices it charges to merchants; it takes those higher transaction fees and passes some of them on to banks that issue Visa debit cards, giving them an incentive to promote Visa debit cards over other forms of debit cards. Not only that, there are different fees on debit cards depending on whether you use them like a credit card (signing for them) or like an ATM card (entering a PIN). Signing costs the merchant more, so the banks and Visa give you incentives to sign instead of using a PIN. The end result is higher costs for merchants, who pass them on to you.
Year: 2010
The Crisis This Time
This morning at the American Economic Association (AEA) meeting in Atlanta, I was on a panel, “Global Financial Crises: Past, Present, and Future,” with Allen Sinai (the organizer), Mike Intriligator, and Joe Stiglitz.
The Wall Street Journal’s RealTime ran a summary of my main points: growth in 2010 may be faster or slower – depending on how lucky we get- but, either way, the most serious problem we face is that 6 banks in the U.S. are now undeniably (in their own minds) Too Big To Fail. Continue reading “The Crisis This Time”
Another Approach to Compensation
The problems with the traditional model of banker compensation are well known. To simplify, if a trader (or CEO) is paid a year-end cash bonus based on his performance that year (such as a percentage of profits generated), he will have an incentive to take excess risks because the payout structure is asymmetric; the bonus can’t be negative. That way the trader/CEO gets the upside and the downside is shifted onto shareholders, creditors, or the government.
I was talking to Simon this weekend and he said, “Why a year? Why is compensation based just on what you did the last year? That seems arbitrary.” When I asked him what he would use instead, he said, “A decade,” so I thought he was just being silly. But on reflection I think there’s something there.
No to Bernanke
The American Economics Association is meeting in Atlanta, where Simon says it is frigid. I went to an early-January conference in Atlanta once. There was a quarter-inch of snow, the roads turned to ice, and everything closed. All flights were canceled, so I and some friends ended up taking the train to Washington, DC, which had gotten two feet of snow, and eventually to New York.
Paul Krugman’s speaking notes are here. Ben Bernanke’s are here.
Bernanke’s speech is largely a defense of the Federal Reserve’s monetary policy in the past decade, and therefore of the old Greenspan Doctrine dating back to the 1996 “irrational exuberance” speech–the idea that monetary policy is not the right tool for fighting bubbles. The Fed has gotten a lot of criticism saying that cheap money earlier this decade created the housing bubble, and I think it certainly played a role.
Doom Loop, UK Edition
In the Sunday Times (of London) today, Peter Boone and I address what the British authorities can do to break their version of the boom-bust-bailout cycle.
There is a certain amount of fatalism about these issues in Europe. This is misplaced. In the short-term, European policymakers have an important opportunity to diminish the political power of big banks, particularly because peer review – through the European Commission, the G20, and even the IMF – is more likely to have impact there than in the United States.
It’s an open question whether the degree of ideological capture by finance was stronger over the past decade in the US or the UK. But at least leading UK policymakers have started to push back against their banks; in the US, Paul Volcker remains a relatively lonely quasi-official voice.
By Simon Johnson
The Baseline Scenario 