Financial activity and regulations have a delicate relationship. Construct too many rules and the flow of needed money can dry up. Have too few and it can lead to questionable behavior. It’s in this environment that David Singer works.
The MIT associate professor of political science studies international political economy, with two main focuses. One is banking crises and why some countries get hit harder than others. The second is the effect of money sent home by immigrants. At the core of both is how reliable funds can provide comfort and assurance to — and also inspire complacency in — both people and governments. As Singer says, it’s a dependability that can be tracked and that can provide a barometer to financial institutions and investors trying to find the elusive quality of predicting future behavior.
Trying to rein in activity
With banking crises, Singer tries to answer two questions: Why do they happen, and why are some economies more stable than others? The answers hinge on the amount of a country’s financial activity and the relationship between the conventional banking industry and non-banking financial institutions, he says. As an example, take the United States and Canada in 2008; the former had economic trouble while the latter experienced comparatively minor upheaval.
One possible reason, Singer says, is that the United States has more developed stock and derivative markets, and this vibrancy created incentives for bankers to take more risks than was probably prudent. Singer says that by understanding those kinds of factors, along with what regulations existed, precautions could be taken to prevent future downturns.
One possible idea is reinstating provisions of the Glass-Steagall Act. The Great Depression-era legislation separated commercial and banking activities and affiliations, but by the 1980s and '90s, the restrictions had eroded. Singer doesn’t necessarily believe that regulations would be the ultimate fix. “It doesn’t seem to matter if there’s a separation of banking and investment banking,” he says.
The central element with economic vulnerability is the amount of market activity, and no amount of policies would eliminate risk, Singer says. Adding to the challenge is that bank owners reap the rewards of risk-taking, but society as a whole bears the costs of failures. Regulations, though, aren’t without merit, as they bring a focus on the drivers and incentives. One move that might help in the United States is instituting capital requirements, dictating how much a bank needs to hold in relationship to its lending portfolio. In the past, the percentage wasn’t high enough, and shoring that up would be an important first step in maximizing stability, Singer says.
With any kind of regulation, timing is key. There’s only a finite period to address a collapse. Once an economy improves, motivation lessens and inertia sets in. Singer says that the United States has only two more years to adopt any changes. While the banking and financial world may resist, he says that it, along with the government, has a mutual interest in being as crisis-proof as possible.
There will be a rebalancing of the global economy in the next several years as money returns to the United States and Europe. Attention will be paid to how much risk banks will be taking. In order to do business, people will need to feel that financial institutions will be there in 20 years. “I think it helps the banks if the public is confident in their stability,” Singer says.
When money comes back home
Singer also studies the effect of remittances, the money sent home by immigrants. In 2013, the amount to developing countries was estimated at $400 billion. For some countries, it’s a major source of financing — for the Philippines, for example, it’s 10-12 percent of the country's gross domestic product, Singer says. In some instances, the influx is not a surprise; if a natural disaster hits, for instance, money comes in. In that respect, remittances are counter-cyclical to traditional financing; normally, when a national crisis occurs investors start disappearing.
The big question to be answered is how this money influences how governments manage currencies and spending. Singer says that records go back to the 1970s showing that remittances have been consistent. That reliability has a few effects. For one thing, it’s easier for governments to fix their exchange rates. They give up the ability to quickly re-adjust in response to emergencies, but the dependability can be tracked. “We can understand why governments are making the decisions that they are,” Singer says.
Governments in countries with steady remittances also tend to spend more. One reason is that remittances lead to increased tax revenues — households tend to spend the money immediately on basic needs. Another is that remittances make it easier for governments to borrow from international markets. In the face of crises, the money provides assurance to investors. The governments, in turn, are a better credit risk and pay lower borrowing premiums. “Remittances function as an automatic stabilizer,” Singer says.
The downside of easy money
Some questions still exist with remittances. One is the future role of banks. The ease of having an account and sending money home bring concerns such as money laundering and illicit financing. If banks are going to attract remittance business, they would need to track such activity and institute safeguards. The risk is that overly strict regulations and costs could inhibit people from sending money back home or force them to bypass banks — instead using other means such as cell phones, which can easily be used to transfer money. These conditions, says Singer, are going to force banking institutions to figure out how central they want to be in the process and how they want to navigate this landscape.
One school of thought is that remittances help to prop up autocratic leaders and facilitate political corruption, by enabling households to turn their backs on the government because they are able to provide for their own security and welfare. Singer says that this argument is overblown. “No household would relinquish its demands on the government for paved roads, clean water, or pensions simply because a family member lives abroad and sends money home,” he says. “Instead, it’s reasonable to assume families would rather not be dependent on the relative and would prefer local employment opportunities.” This could, in fact, be one reason why remittances are correlated with greater government expenditures, which often support job creation, he says.
The larger issue — and the greater challenge — for Singer is that the financial landscape is ever-fluid. Remittances are easy to overlook and dismiss, and much about them remains unknown by the nature of the regions they affect. But they can play a key role in economic stability and potential investment returns. “Future research will help political leaders and financial managers to understand the calculus of government decision-making in this new era of globalization,” Singer says, “and provide clues as to how to prevent financial crises and economic downturns.”