So there are good bubbles and bad bubbles. A good bubble is one where the benefits outweigh the costs. So public policy should not intervene to manage good bubbles, and by implication are endorsed.

Endorsing good bubbles implies either:

policy-makers can identify in advance which bubbles will turn out out to be good and which ones will be bad. Even if this is possible, the success of a series of good small bubbles comes with the potential addiction to same , which may eventually be dwarfed by the tsunami effect of a tail good bubble gone bad.

OR

policy-makers cannot identify in advance which bubbles will be good, but a bubble which looks like it might turn bad can be controlled, to keep it good. This also presumes that the steps taken can be implemented in a timely manner, and that the benefits outweigh the costs.

It all sounds like more “fed-speak” to me.

Johnson: “In other words: keep monetary policy right where it is, and don’t worry about financial regulation.”

Really? It sounds to me like regulate leverage.

That jives with what I was told when I was a kid: Too much leverage caused the Great Depression.

I have over the last decade been very clear on that those who actually destroyed wealth and jobs were the financial regulators, by means of giving special incentives to banks to finance supposedly low-risk AAA sector, a sectors where the jobs of tomorrow are not created and a sector that could also turn into an unsafe place if too much capitals go there. You see our regulators had nothing but keeping the banks from failing on their agenda and that is why the banks were failing society even while they were not failing.

A windfall tax… on what banks? Your small community banks with their “risky” clientele base of small businesses or entrepreneurs which had absolutely nothing to do with this crisis but that are now paying the highest price as they get crowded out from access to bank credit? I do not think so.

If anything place a special tax on all those transactions that have been subsidized by mean of the very low capital requirements they imposed on the banks because they were supposed to be not risky. Call it a transaction tax on the AAA rated if you want. That would also target the too big to fail problem because it is in this AAA sector of the economy that the largest have grown.

Indeed you can go that route if you have a job and some good savings and can therefore afford to satisfy your lust for revenge, but if you do not have a job you should be more concerned with making sure your banks help you to create the jobs that are needed.

By the way I have no problem with the example Baker gives of the UK 0.25 percent tax on the sale or purchase of (all) stock but going from there to a “We can raise more than $140bn a year taxing financial transactions, an amount equal to 1% of GDP.”, sounds to me like pure political posturing and intellectual dishonesty.

The Brazilian 2 percent tax on the other hand has the purpose of counteract what they perceive is a distortion, namely too much hot money entering Brazil. I think the old Chilean way of freezing the funds entering the country for one year, so as to ascertain the seriousness of their intentions, no one night fling there, is a better way than the Brazilian 2 percent… but that is a different debate.

Large banks delve more with those “perceived risk categories” that have been benefited with very low capital requirements e.g. operations involving AAA rated companies that have a 1.6 percent bank capital requirement while small banks are more prone to be dealing with local BB+ or less rated or unrated clients which require 8 percent. This, plus the fact that they can use their own internal risk assessment programs is one of the reasons the too big to fail grow even larger.

And so, since I want to lower the requirements on those clients that are more typical of smaller and community banks, well yes in this sense this would mean, temporarily lowering the capital requirements for those small banks… that never got us into this crisis.

But it also means that larger banks, while they are rebuilding their capitals, could find it easier to carry the clients we really want and need them to carry. As I have said many times, our banks should not even be in AAA territory… that is for the capital markets.

The new world which has emerged is a world of substantial polar extremes, but which is controlled by the wealthiest and most powerful to the detriment of those who are not.

I feel like I am watching the last act of a world gone crazy and working its way to December 21, 2012, the date the Mayan Calendar stops. Globally, we’re in deep manure with no boots, and it’s just getting worse. When was the last time the US fought a war that should have been fought: nearly 70 years ago. When was the last time a CEO was paid what he was really worth: my guess: about 40 years ago. Why is it necessary for those with three yachts and four homes to receive multimillion dollar bonuses: answer: it’s not.

Sure for a true competitive market you need a very large number of participants, transparency and low start-up costs, among other conditions, and none of these exist in investment banking and breaking up the big banks would help. But it is just a first step.

Capital requirements for banks based on perceived risks, which help to “divert” the financial flows into areas just because they are supposedly risk-free even though they could also be absolutely useless, that is truly idiotic.