August 01, 2015

Sometimes seemingly unnecessary navel-gazing research is necessary; like when bank regulators ignore what’s obvious.

Sir, I refer to Tim Harford’s “Worming our way to the truth” August 1.

Let me see if I understand it. The issue at hand is about research on whether “deworming treatments produce not just health benefits but educational ones, because healthier children were able to attend school and flourish while in class. The treatments [according to WHO around $0.22 per year per child] are cracking value for money. Third, there are useful spillovers: when a school full of children is treated for worms, the parasites became less prevalent, so infection rates in nearby schools also fell.”

Honestly, does Harford really need research to draw that conclusion? As long as the deworming treatments did good deworming what they were supposed to deworm and nothing more, could he ever think of a different result? To me it certainly looks like unnecessary navel-gazing research.

But then again, as there are cases where even “experts” draw absolutely wrong conclusions, sometimes navel-gazing research might be important. For instance in the case of bank regulations it should be clear what is perceived as safe has the greatest potential of producing those unexpected losses against which banks should hold capital. Nonetheless regulators thought differently and allowed banks to hold much less capital against what is ex ante perceived as safe than against what is perceived as risky. And we sure all would have benefitted had they researched what really causes real major bank crises. As is our banks are now dangerously overpopulating the safe havens against little capital, which is precisely the stuff that major bank crises are made off.

Also any development economist that does not understand how dangerous it is for the future of any economy to favor the allocation of bank credit to what is perceived as safe is not worthy of his title as he more than anyone should know that risk-taking is the oxygen of any development.