Digest: 2 June 2013
The international investment banking industry shows promise for growth, but not for all banks – the enormous industry-wide growth between 1963 and 2008 will not continue; Very large global banks stand to gain the most from the flux coming out of the financial crisis, even after regulations that were supposed to tame such systemically important institutions; Attempts to genetically engineer plants to glow in the dark are skirting regulations and causing fear that such unharnessed projects may create and introduce organisms that are ecologically dangerous; Opponents of immigration reforms are misguided in that they fail to appreciate exactly what it is they are arguing against – conservatism, societal assimilation, marriages, social mobility, skill, and inevitability; New regulatory laws for systemically important financial institutions must be very carefully considered in their application to non-bank financial enterprises such as insurers who operate according to very different business models from those used by banks; Huge government savings can result from greater efficiency in government agencies – overlaps, fragmentation, and duplication run up huge costs for the federal government – greater efficiency must continue to be rigorously pursued; US spending on health is unsustainable, and yet to cut back on such costs would interfere with the growth of employment in the health industry – the US must consider how to balance these competing interests.
In International Banking: Twilight of the Gods, The Economist discusses the state of the investment banking industry. The Economist considers the remarkable rise of banking between 1963 and 2008, but also the collapse of ROE since the 2008 financial crisis. Positive signs are there for those in finance, but ranged against those are other factors that will hold back the growth of the industry and its profitability. The main beneficiaries of the continuing flux will be a handful of very big global banks.
In The Outlook: Down to Earth, The Economist discusses the future of investment banking, and how “stricter regulation intended to tame banks that were thought too big to fail is leading to the creation of even bigger and more systemically important institutions.” Small specialist investment banks are also likely to thrive; but the industry as a whole is not expected to grow.
Both of the above two articles are part of a Special Report on International Banking by The Economist – readers are encouraged to access the full Special Report at TheEconomist.com.
In A Dream of Trees Aglow at Night, Andrew Pollack (for The New York Times) discusses how biotech hobbyists and entrepreneurs are looking to genetically engineer plants to glow in the dark. The promise of such synthetic biology is highly controversial as it is considered to heighten risks of the widespread and uncontrolled development of potentially malicious organisms. One project has received as much as $250,000 from Kickstarter contributions, but while the Federal Agriculture Department regulates genetically modified plants, it only does so where relevant to plant pests. These glow in the dark plant projects do not involve pests, and have so far been considered exempt from GM regulations.
In Beyond the Fence, David Brooks (for The New York Times) discusses the United States’ dysfunctional immigration laws. He argues that while opponents of reform have one core concern – control – they fail to state clearly what it is they are trying to control. Brooks argues that these opponents are misguided in arguing against reform – specifically he points out that immigrants are conservative, they assimilate, they marry into American society, they are socially mobile, often skillful, and finally they are inevitable. He points out that to argue against immigration is essentially to ignore these realities, and that to do so is to establish a position of political irrelevance.
In US Weighs Wide Overhaul of Wiretap Laws, Charlie Savage (for The New York Times) discusses how the Obama administration is on the verge of backing an FBI plan to make it easier to wiretap people using the internet. The changes include fines for internet companies that fail to provide technical assistance to law enforcement agencies, even if the failure is a result of technical inability.
In Regulating Systemically Important Financial Institutions That Are Not Banks, Douglas Elliott (for The Brookings Institution) discusses the upshot of changes to the regulation of SIFIs under the Dodd Frank Act. Uncertainties as to how this new law will effect certain institutions remain acute where non-bank entities are concerned. Under Dodd-Frank, financial institutions that are considered to be systemically important are to be regulated more closely, potentially with greater safety margins like higher capital requirements and limitations on activities. While these requirements may make sense for systemically important banks, it is crucial that the one-size-fits-all approach not be unthinkingly applied to institutions such as insurance companies that operate according to a very different business model from those used by banks.
In Government Efficiency and Effectiveness, the Government Accountability Office discusses areas where federal agencies can achieve greater efficiency or effectiveness. Much of the failure in this area can be ascribed to fragmentation, overlap, or duplication of efforts. While the Obama administration and Congress have made headway in light of previous GAO reports, much remains to be done – in the area of Defense, for example, fixing fragmentation in the development and acquisition of combat uniforms could realise up to $82 million in savings.
In Economic Growth: The Health Paradox, The Economist discusses the paradoxical problem of shrinking US health costs – while such costs are unsustainable, they have come to support tens of millions of jobs. If US health costs continue to grow as they have been over time (in 2011 spending on health in the US amounted to 17.9% of GDP, and half of this was paid by the government), public spending towards them will come to threaten the ability for the US to effectively invest in other programs such as infrastructure and education. The simultaneous growth in the health industry proved to be recession-proof as it continued to grow through the economic downturn – currently the number of healthcare related jobs is up 28% since 2001. If public spending is diminished, this will damage the growth of this industry, and will cause a resulting decrease in the jobs it provides.