In my macroeconomics tutorial last week I accidentally started a heated debate about an issue that I did not think was going to cause much controversy. The topic of the week was financial markets and financial globalization, here's a quick summary of the bits we talked about:
- Financial markets have become incredibly interconnected in the past decade due to the globalization of, well, everything
- This means the national banking systems of different countries are closely connected
- Put simply, banks fail when they don't have enough assets to cover their liabilities
- There are mechanisms in place to keep banks from failing
In the tutorial, we discussed some of these mechanisms and how they might fail to prevent banks from failing. There is deposit insurance which basically means when there's a loss, the deposits of the banks are insured (but only up to a certain amount, plus this doesn't always apply to bank branches abroad!). Reserve requirements are another one of those safety nets, they require banks to hold a certain percentage of their assets at the bank, which means they can't loan out the money and earn interest on it.
Note that these mechanisms are there to secure the bank, not necessarily the interests of the depositors. I know way too little about the banking system to suggest a complete revolution, but knowing they're not going to be the ones liable in the end creates an incentive for bankers to make riskier bets, or at least it doesn't keep them from doing so.
So, when we were asked what other mechanisms we could come up with I suggested that we should come up with a way to make banking more responsible by making decision makers partly liable. When I said that some dude from the back of the room interrupted me saying that's not economics that's a legal issue. As is economics was completely isolated from the rest of society. Regardless of what you think of that idea I think it's incredibly dangerous to talk about economics only within the realm of models and assumptions rather than the real world (even if it's just a tutorial). Students should be encouraged to recognize how economics interacts with politics and the law and how we can make use of that rather than just constraining ourselves to hypothetical models.