Public Interest versus Private Interest #Notebook
Governments face a budget constraint and opportunity costs, it can’t afford to monitor everyone all the time, officials are not the angels.
Most of the time, private interest prevails, in the government. Could regulators stop bad activities, events, and people even if they wanted to? No! It's the old nemesis, asymmetric information. Democracy is also no guarantee that governments will serve the public interest.
Most major economic foul-ups stem from a combination of market and government failures, it's hybrid failures.
Bank panics can further the increase in asymmetric information, and further declines in economic activity followed by an unanticipated decline in the price
level.
During the Great Depression, per GDP shrank, the number of bankruptcies soared, M1 and M2 declined, and so did the price level.
Normally, only the government had the resources and institutions to stop the Great Depression. The Federal Reserve could have deflated the asset bubble before it grew to enormous proportions and burst.
Whatever the cause of the crisis, it shattered confidence in the banking system. However, the Federal Deposit Insurance Corporation (FDIC), did restore confidence, inducing people to stop running on the banks and thereby stopping the economy’s death spiral.
However, the deposit insurance is NOT cost-free. Insurance also reduces depositor monitoring, and allows bankers to take on added risk. With deposit insurance, depositors often ignore the warnings and shift their funds to fetch the most interest.
The Security and Exchange Commission’s (SEC) stated goal, to increase the transparency of America’s financial markets.
If somebody has no capital, no skin in the game, moral hazard will be extremely high because the person is playing with other people’s money.
CAMELS is an international rating system used by regulatory banking authorities to rate financial institutions, according to the six factors represented by its acronym, "Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity."
Reference
Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation. Licensed under Creative Commons Attribution-NonCommercial-ShareAlike CC BY-NC-SA 3.0 license.
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