Publications

Some time ago, the story of Martin Shkreli, an entrepreneur who made the news as a candidate for “the most hated man in America” (thus the BBC), caused a stir: he bought the intellectual property rights needed to produce a life-saving anti-AIDS drug, and immediately afterwards raised the price by 5,000%.
Beyond the merits of the affair, what caused the most stir was the unapologetic attitude of this businessman, who did not care about the criticism of moralists and defended his right to maximize profits for himself and the investors of his hedge fund in a contemptuous manner.

As shown in Peter Higgins’ book “Immigration Justice”, two distinct positions dominate the immigration debate. The nationalist position assumes that states should favor the interests of their own citizens over those of foreigners. By contrast, the cosmopolitan position claims that residents are entitled to no privileges.

A few weeks ago, the bodies of 39 people were found in a lorry trailer in Essex. They were Vietnamese migrants, including eight women, three boys and twenty-eight men. The eldest victim was 44, the youngest 15. This was just one in a series of dreadful events that have occurred in Europe over the last few years. A long chain of desperation and hope that has produced nearly 10 thousand deaths in the Mediterranean Sea over the period 2016-2018.

WP 2020-01.

Sir Donald Brydon, former Chairman of the London Stock Exchange, published just before Christmas his wide-ranging review of the UK audit industry. This is likely to have significant ramifications for bank financial reporting throughout Europe because (with only a few national opt outs) accounting and auditing rules set in London form the basis of the relevant European Union (EU) directives.

The recently updated European Markets in Financial Instruments Directive, commonly abbreviated as MiFID II, is supposed to enhance consumers’ protection. Adjustments of regulatory background questions aside, the EU aims to improve “protection of investors by prohibiting the acceptance of commissions, protecting independent consulting, introducing new regulations regarding product monitoring”. This intention seems laudable, especially given the presence of some black sheep among investment advisors. However, a well-meaning policy is not necessarily also good for consumers. While the providers of financial services now legally safeguard themselves using elaborate documentation, clients do not necessarily receive better guidance. In fact, extensive documentation could possibly scare customers off.

Cost-benefit analysis is far from being a perfect tool. In particular, the subjective nature of costs and benefits makes all calculations arbitrary. Thus, it may happen that policymakers take bad decisions even when applying the best methodology. Yet, the world of politics requires that decisions be taken, and I believe that cost benefits analysis can still be helpful (and better than groping).

In November, Germany’s Finance Minister Olaf Scholz wrote an article in the Financial Times claiming that he had devised a common European Deposit Insurance Scheme (EDIS)[[EDIS has since 2015 been envisaged as a Eurozone-wide scheme which would cover the costs of repaying deposits of up to euro 100,000 lost in future bank failures.]] that could be acceptable to both sides of the hitherto gridlocked debate. Mr Scholz also circulated a document which he believed provided a clever solution to the stand-off between the heavily indebted European member states (‘debtor countries’) and the rest of the Eurozone. In particular, since the 2010 outbreak of the first Greek sovereign-debt default crisis, a number of countries led by Germany resisted debt mutualisation and the sharing of the costs of other countries’ bank failures. In fact, the financially stronger countries demanded new banking rules, which would ensure that any common bank insurance scheme would apply only to banks demonstrably solvent at the scheme’s inception. The stand-off has endured for over two years because the weaker countries, and Italy in particular, continue strongly to resist any reform of the rules which would overtly expose any of their major banks as insolvent.

Over the years, we have witnessed a general decline in the level of trust in the news as recorded by the general public. For example, according to the latest Reuters Institute Digital News Report, the average level of trust in the news is down 2 percentage points to 42%, with peaks such as -11 in France or -6 in The Netherlands. The literature suggests several factors which could explain such decline. Citizens perceive a drop in the quality of journalism, resent the rise in commercialization, react to the abundance of information after the internet revolution. Populism with its fake-news mantra has also played a role. Moreover, any event or situation that raises doubts about impartiality can affect trust.

In a recent speech, the Vice Chair for Supervision at the Federal Reserve R.K. Quarles extensively cited F.A. von Hayek. Quarles highlighted Hayek’s argument on freely determined prices as crucial to convey knowledge across operators and enhance a functional economic order. By contrast, he argued, distorted prices harm economic performance. Rather surprisingly, however, Quarles concluded by endorsing another cut of the Fed Funds rates (this line of thinking also applies – mutatis mutandis – to the European context too). Indeed, interest rates are “prices”, and manipulated interest rates are also “biased prices”. So, what should we make of Quarles’ speech?