Morgan Stanley Speaks: Against Relying On Capital Requirements

Just when momentum was starting to build for increased capital requirements as the core element of an approach that will reign in reckless risk-taking, Morgan Stanley effectively demolishes the idea.

In “Banking – Large & Midcap Banks: Bid for Growth Caps Capital Ask,” (no public link available) Betsy Graseck, Ken Zorbo, Justin Kwon, and John Dunn of Morgan Stanley Research North America dissect the coming demands for more bank capital. 

“In short, we think the demand for growth and access to credit will trump desire for unprofitable capital levels…

For the large cap and midcap banks, we expect normalized median common tier-1 ratios to come in at 8.4% and 10.0% respectively.”

That’s less capital than Lehman had just before it failed – 11 percent.  (If you doubt this, read the transcript of the final Lehman conference call – link is in this NYT.com piece or try this direct link; see p.7, for example)

The Morgan Stanley logic is strong, up to a point – they are carefully anticipating the likely outcome of the national and G20 regulatory process that will address capital standards in detail over the next two years.  This research report also makes explicit a great deal of the current thinking on Wall Street and explains much – including the attitude towards bonuses.

“Banks need and investors require banks to earn a positive return over their cost of equity to fund them…

These capital levels [8.4% and 10%]  driven median ROE [return on equity] estimates of 13.7% and 12.0%, sufficiently over normalized cost of equity of 9-12% to attract investors.”

In other words, if you don’t allow banks to leverage (the flip side of keeping capital low), they won’t be able to attract investors and won’t be able to make loans – so you’ll get less growth and fewer jobs.

This may sound like blackmail but it is not – this is the economics of banking, with spin.  And just to make sure you get their bigger point, Morgan Stanley drives it home:

“Contrary to perceptions about [Sheila] Bair’s statements, we do not think there is any willingness to remove implicit support [for big banks].  In particular, we expect the discount window is unquestioned for banks, and TLGP [Temporary Liquidity Guarantee Program] type programs could exist in future crises.  Regulators recognize the need for banks to make returns high enough to attract capital.”

And in case you are wondering about the talking points they give their lobbyists and now press upon the White House,

“Even with appropriate leverage, the taxpayer has occasionally paid for the benefit of growth when financial shocks occurred.  Repayment comes with subsequent growth.”

The bottom line, translated: let us adjust our balance sheets (downwards to some degree) and continue with our existing business models (including unconstrained bonuses), and we will bring you back to growth eventually.  If you mess with us, unemployment will stay high for a long time.  And any future crises that may befall us are just a cost of doing business, and making us whole is just what you have to do.

But this is all wrong.  The essential premise of the Morgan Stanley reasoning (heard much more widely on Wall Street) is that the size of our biggest banks cannot be constrained – because it would raise the cost of equity for these smaller units.  This misses three points:

  1. If you are sufficiently small, you can take more risk without jeopardizing the system.  So the expected risk/return combination can attract investors and be fine for society.  Most successful venture capital funds, hedge funds, and private equity funds are in the right size range from this perspectives and don’t have trouble attracting capital – except when the big banks blow up.  As long as you are small enough to fail, go for it.
  2. Morgan Stanley’s pricing of risk model implicitly assumes that big banks still exist as a comparison point and an alternative for investors.  But if you put a size cap on the largest banks (e.g., assets cannot exceed 1% of GDP), this defines the asset class available – so investors don’t choose small vs. medium vs. large; they choose small vs. medium.  Yes, this removes a choice for investors, but we routinely constrain investors ability to put money into activities that are potentially dangerous for society (e.g., try proposing a “new” high risk/high return approach to nuclear power).
  3. There will always be financial shocks, but these do not always need to have such devastating effects.  Our financial system worked fine in the post-World War II period, with a great deal of risk-taking and much nonfinancial innovation – our biggest banks were much smaller, in absolute terms and relative to the economy.  The notion of “let us take any risks we want and, if it all goes bad, bail us out so we can make it up to you later” is simply preposterous and completely at odds with the historical record of US economic development. 

The big banks’ bonuses undermine their legitimacy.  Every time these banks CEOs speak or write in public, they just underline their hubris and the danger this poses to financial system stability.  And their own research strengthens the case for breaking up the megabanks.

By Simon Johnson

53 responses to “Morgan Stanley Speaks: Against Relying On Capital Requirements

  1. Re: Morgan Stanley says we think the demand for growth and access to credit will trump desires for [sane capitalization requirements]

    It’s official — Wall Street and Main Street reside in different Universes!

    Now that this confusion has been cleared up, perhaps we can construct a world in which Wall Street banks exchange profitable paper with each other, and the rest of us get on with our lives.

    Unfortunately, they run the Government, which is just one among many other difficulties with my sensible, simple plan.

  2. Your three points are the ones that matter. Imposing size limits is the answer because it is simple (relatively speaking), sensible and can be done globally by diverse regulators. And, by taking away concentrated power in the hands of so few, there will be more market place diversity and competition. Size limits also will help stop the further leveraging of capital, which today is trumping good ideas, knowledge and thought as a means to make money. It would be great to return to a world in which the rewards are paid to scientists and engineers who create real value instead of financiers who often create nothing but paper profits.

  3. We’re close……we’re real close!

  4. What about herding behavior? If banks replicate each others’ portfolios, as they have a tendency to do, don’t we end up with a similar result, regardless of the size of individual banks?

    Also, while it may (or may not) have been for different reason(s), we didn’t have TBTF banks in the 19th century, yet huge crises still occurred. What’s different now?

  5. “Even with appropriate leverage, the taxpayer has occasionally paid for the benefit of growth when financial shocks occurred. Repayment comes with subsequent growth.”
    The bottom line, translated: let us adjust our balance sheets (downwards to some degree) and continue with our existing business models (including unconstrained bonuses), and we will bring you back to growth eventually. If you mess with us, unemployment will stay high for a long time. And any future crises that may befall us are just a cost of doing business, and making us whole is just what you have to do.

    We know trickle-down is a flat out lie. They’ve had forty years to make it work, and the result has been nothing but intensifying wealth concentration along with wages, jobs, working conditions, benefits, the safety net, the quality of life in general, feelings of stability and security, freedom itself, eroding across the board.

    This has been nothing but a complete expropriation. And now with brazen, arrogant lies like this the gangsters openly laugh and bluster that for the rest of American history we’ll be slaves under the thumb of history’s worst protection racket.

    These thugs will be right for as long as the politics stay this way. This report is correct about that: There’s no natural law of “economics” as work here. This is kleptocratic politics plain and simple, nothing else.

    “Contrary to perceptions about [Sheila] Bair’s statements, we do not think there is any willingness to remove implicit support [for big banks]. In particular, we expect the discount window is unquestioned for banks, and TLGP [Temporary Liquidity Guarantee Program] type programs could exist in future crises. Regulators recognize the need for banks to make returns high enough to attract capital.”

    It’s actually a step in the right direction to have such refreshing legbreaker honesty, unlike the repulsive lies we get from politicians like “Obama” about how we “need” to do this.

  6. “let us take any risks we want and, if it all goes bad, bail us out so we can make it up to you later”

    I strongly suspect this is Larry Summers’ belief, and a principle that has guided the credit-channel-focused “recovery” plan. The notion being this:

    “Yes, the cost of a bailout is high, but the efficiencies that the economy gets from the high risk/high leverage system (in terms of greater investment) more than compensate – and make it worth it for you (the taxpayer) to bail us out. When you subsidize our risk-taking, you are actually subsidizing investment in the economy.”

    Or in the words of Lloyd Blankfein: “we are doing the lord’s work”.

  7. [comment split to avoid comment filter]

    You can sail an oil tanker through the holes in this argument.

    1) There is an overwhelming presumption that the credit being generated is going into productive investment. In practice, it did not – it went into malinvestment, and excess consumption (helping shift the economy from a 7-10% savings rate to briefly negative, and helping drive a massive and ongoing trade deficit).

    Indeed, banks _actively targeted_ consumption activities through their marketing efforts (offering home equity lines and credit cards to fund vacations, dining out, unnecessary home remodeling, etc.)

    2) There is the presumption that the benefits of the investment (if it occurs) – are being felt by the taxpayer, when in fact we see massive rising income disparities largely driven by finance activities. To believe their argument, you would need to believe “Trickle Down Economics”.

    3) There is the presumption that this investment would not occur through some other mechanism, such as a higher savings rate or long-term-investment tax benefits.

    4) There is no recognition of the potentially damaging effects of these activities on the national and global monetary policies, nor the constraints they create on monetary policy – in short, when leverage is high, drastic changes to monetary policy are _multiplied_ in the same manner that money is multiplied through banking practices.

  8. International banks appear to be working from the same spin script. Peter Sands, CEO of Standard Chartered PLC, a British bank that has large operations in Asia, Africa and the Middle East, comments:

    “There has been some wishful thinking that you can have a banking system hold “X” amount more capital and “X’ amount more liquidity and there is no economic cost. The reality is that the cost will be transferred through to either reduced capacity of lending or higher cost of lending, and that will have an impact on economic growth.”

    http://blogs.wsj.com/economics/2009/11/04/qa-standard-chartereds-sands-on-emerging-markets-bubbles-and-regulation

  9. “Even with appropriate leverage, the taxpayer has occasionally paid for the benefit of growth when financial shocks occurred. Repayment comes with subsequent growth.”

    Maybe we just need to get past the assumption that growth is the goal.

  10. So long as the casino remains open, leverage will increase to make the system increasingly hostage to any abrupt shift in any variable on which the bets are placed. As before all the bets are being laid in the same direction, and hedged by the banks as best they can be, that is, imperfectly. There is nothing to suggest that raising bank capital can prevent the next crisis. Speculative activity will expand to create maximum leverage. Short term profits will be siphoned off as performance bonuses, and risk will remain with the taxpayer who looks more like a subprime ARM borrower every day.

    Leaving in charge (and indeed further enriching) the same idiots who created the last crisis has guaranteed that nothing will happen to resolve the problem. It is all lipstick on the pig. We may get a hyperinflation and we may get a deflationary depression, but we will surely get one or the other. Of course, nobody can say when, which means that those in power will continue going to the bank a bit longer, and those being robbed will keep being robbed.

    We had a chance last year to close the casino and liquidate the institutions and many of the people responsible for the disaster. Fear disabled those of our ignor amus politicians not actually on the take. Posts like this have an amusement value. Keep them coming.

  11. So long as the casino remains open, leverage will increase to make the system increasingly hostage to any abrupt shift in any variable on which the bets are placed. As before all the bets are being laid in the same direction, and hedged by the banks as best they can be, that is, imperfectly. There is nothing to suggest that raising bank capital can prevent the next crisis. Speculative activity will expand to create maximum leverage. Short term profits will be siphoned off as performance bonuses, and risk will remain with the taxpayer who looks more like a subprime ARM borrower every day.

    Leaving in charge (and indeed further enriching) the same id iots who created the last crisis has guaranteed that nothing will happen to resolve the problem. It is all lipstick on the pig. We may get a hyperinflation and we may get a deflationary depression, but we will surely get one or the other. Of course, nobody can say when, which means that those in power will continue going to the bank a bit longer, and those being robbed will keep being robbed.

    We had a chance last year to close the casino and liquidate the institutions and many of the people responsible for the disaster. Fear disabled those of our ignor amus politicians not actually on the take. Posts like this have an amusement value. Keep them coming.

  12. Unless someone can clearly point to an short run impending financial disaster, it would seem that the political class and financial elites will go back to business as usual.

    Simon, you have written, that the next time may be worse. But that sort is like arguing that global warming will be really bad for humanity, one day.

  13. Thanks James T.

    The ‘leveraging capital trumping good ideas’ is a brilliant one liner. Middlemen throughout the country are literally sucking us dry.(Banking, Insurance, Pharma, Utilities, Media, Military contractors-gee, all deregulated. ‘Shocked to find gambling going on in here’…) These a-holes must be exposed to the light of day.

  14. Here is link to “Banking – Large & Midcap Banks: Bid for Growth Caps Capital Ask,”

    http://www.scribd.com/doc/22652006/Banking-%E2%80%93-Large-Midcap-Banks-Bid-for-Growth-Caps-Capital-Ask

  15. I keep remembering the movie “Flatliners.” A group of bright young medical students take each other to the brink of death by stopping the heart and then resuscitating. With each experiment, they prolong the death experience. Blankfein and the whiz kids from Morgan Stanley evidently did not experience the near death event that the rest of us experienced. Perhaps because, with routine bonuses in the six, 7, and 8 figures even after the crash, the loss of 30 or 40 percent of their lives’ savings doesn’t add up to much. Not to mention job security in a time of high unemployment and the fear of job loss that restrains the average American.

  16. The problem is that, at least over the course of my lifetime, financial panics seem to occur pretty frequently. See S&L, LTCM, the Asian and Latin American meltdowns, the dot-com bust…Shall I keep going?

  17. “Contrary to perceptions about [Sheila] Bair’s statements, we do not think there is any willingness to remove implicit support [for big banks].”

    As long as the Federal Reserve has the power to bailout financial institutions, both domestic and foreign, the presumption of financial support will continue.

  18. And when they lack that power, we can revel in another Great Depression… There is no middle ground?

  19. That was one of my first thoughts as well Mike. There is no guarantee that many small banks wouldn’t align themselves such that they act like one large bank, and could thus all be taken out by the same financial shock. I guess the best response is that these smaller banks, since they could have similar but not identical portfolios, would be unlikely fail at exactly the same time, but would rather be a cascade of failure. Stopping a cascade of failure might be easier/cheaper/more transparent than the financial blackmail of bailing out the TBTF mega-banks in a similar situation.

    So having a cap on bank size wouldn’t solve these problems completely, but it would be an improvement on the current state of affairs.

  20. Eventually, under this scenario, wouldn’t medium banks being allowed to grow overtake larger banks in terms of capital. Or looked at another way eventually all banks would reach a level where we deem them “too big to fail” and therefor cut them off from future growth. This formula only speeds up the process.

  21. The removal of that power will have the following effects:

    The decisions will revert back to Congress and the Administration. They will have to accept responsibility for decisions. At present they are happy to have the Fed do their “dirty work” for them, as they can blame the Fed when decisions don’t work out. Both parties are happy with the Fed’s off balance sheet financing with little accountability and secrecy.

    That’s your middle ground.

  22. My friends,the oligarchs and banksters are in control and we others are to be subservient to their program for continuous financial support.

  23. FYI StatsGuy and off the subject—there will be a continuation of the First Time Home Buyers Program extended to other-than-first-time-home-buyers. Just heard the announcement. I knew you would be ecstatic to hear the news. Personally, I think these guys in Washington are like chimps throwing darts. They are clueless. James K. accused me of being anti-Government when I criticized the management or mismanagement of Social Security, but I am not anti-Government, I am anti-stupidity even when it masquerades as government.

  24. Basically all this is bag banker’s rhetoric for, “We’ll go bankrupt as many times as we wish, we’ll hold insufficient capital on our books, we’ll pay monstrous salaries and bonuses to our executives, and the idiotic boob known as the American taxpayer will pay for it” These boys at Morgan Stanley are putting themselves side by side with Goldman Sachs and doing fist bumps together.

    I do all my savings and retirement investing at Credit Unions. I advise all others to do the same. You can find a Credit Union near you with this link: http://www.creditunionsonline.com/

  25. James K. didn’t accuse you of anything. He made a mild criticism of your insistence on labeling a municipal government savings plan as a private plan. It was not a private plan.

  26. For whatever it’s worth coming from me, this was a great post Simon. One of Simon Johnson’s best posts. James and Simon are firing on all cylinders recently. Great stuff.

  27. markets.aurelius

    Sorry to split your comment, StatsGuy, but this is a perfect place to observe what actually happened in the bailout of Goldman when the US Govt seized AIG. Check out Craig Pirrong’s post on Seeking Alpha first,

    http://seekingalpha.com/article/175000-questions-remain-on-goldman-sachs-aig-bailout

    Then follow the link to nakedcapitalism’s excellent post by Tom Adams, a former MD at a at Ambac and FGIC re why AIG was bailed out:

    http://www.nakedcapitalism.com/2009/11/goldmanaig-conspiracy-theories-theres-a-reason-they-wont-go-away.html

    GS was saved because their exposure was concentrated on AIG — the only CDS cp willing to post margin. When it became apparent AIG would not be able to post, and that this likely would bring down GS, the entire network was mobilized to make sure AIG was not only bailed out but seized. This is serious stuff that none of the mainstream media are equipped to present to the general public.

    There is a smoking gun here, that, in all likelihood would generate at least a grand jury being convened. Timmy! G. needs to be pressed and pressed hard about what he did.

  28. “The essential premise of the Morgan Stanley reasoning (heard much more widely on Wall Street) is that the size of our biggest banks cannot be constrained – because it would raise the cost of equity for these smaller units”

    not sure that is quite explicit enough to be clear

  29. Yes, Simon, glad you can so effectively poke holes in the smoke and mirrors that the TBTF’s put forth. They will continue, and unfortunately each statement gives our bogus financial (bought and paid for) leadership, Summers and Geithner more rationales (like they need more) to continue to feed their friends. I love it that Congress has asked for Geithner’s ouster. It’s time to get rid of him, curb the guarantee programs and stop the allout flood of small and mid-sized bank failures by removing the props for Wall Street.

    What they are arguing for is actually worse than Japan in the Lost Decade. They are making arguments, which, if they continue to succeed, will have America not only looking like a third world country, but actually being one.

  30. “We may get a hyperinflation and we may get a deflationary depression, but we will surely get one or the other ”
    vintage stuff that

    you sound like my father’s generation
    and he was born in 1906
    by the way what’s wrong with getting both ??

  31. …and I forgot to thank you for your valiant defense at the time. You and James are right: the Galveston Plan is a public plan. I was, however, referring to Galveston’s underlying investments—fixed-rate guaranteed annuities—issued by private insurance companies. But what the heck does pointing out that Social Security has underperformed making private savings a necessity have to do with being an anti-government type? No reponse necessary.

  32. maybe jessica it wasn’t a near death experience
    who better to know that then the people in the very middle of it all

    maybe it was as much theatre as reality
    whatever it was
    it sure got the lead players quite nice
    post performance bouquets

  33. lot to be said for this line
    it suggests the house audit move is itself just a big hot bag of wind
    a show for the peanut gallery

  34. sj is proposing an asset ceiling
    for example he used a asset toal not to exceed in value
    one percent of gdp

  35. Didn’t we have something akin to both during the Carter administration? We had significant inflation (although nothing like hyperinflation of the Weimar Republic) with a sharp rise in prices and interest rates and, at the same time, we had high unemployment, static wages, and slow economic growth.

  36. Why don’t you and the rest of the “sincere” people on this website — including Kwak and Simon, just admit that the Finance industry has “captured” the elected powers, the Executive, and the regulatory powers, that’s all there is to it? If you do, I guess that the rest of us can just get on with our lives, as powerless people have always done.

    Does anybody on this website understand history? Is this not how civilizations and Empires end? Is that so hard to figure out?

    What part do you not understand?

    I’d be pleased to enlighten you further.

    But I guess that wouldn’t make for such a sophisticated, well-reasoned conversation where everyone can make splendid points and show how smart they are… while accomplishing nothing.

    The Buddhists call this the Wheel of Suffering (Life, etc.)

    Round and round you go.

  37. Richard Hoogesteger

    Simon-You are right of course and breaking up the big banks would reduce their market power somewhat. I still beleive that we need to return to something like the New Deal type of regulatory framework for banks though. Giving banks the amount of control over total credit that they currently have puts them in a position very similar to that of the oligopolistic banks of the U.S. in the nineteenth century. A mistake or misconduct by a handful of bankers can disrupt the entire economy. The report by Morgan assumes that the government will always be able to fix these problems. However if we remember what happened in 1929 and look at the global economy today it is easy to visualize a situation that would be bad enough so that governments could not repair the damage. A loss of confidence in the world financial system could create a world-wide depression that would be difficult to end.

  38. We need a federally chartered banking service that would provide checking, simple passbook savings, say,50% reserved, making small personal, maybe auto loans kept to maturity, all insured by FDIC.

    Anyone wanting to loan or needing to borrow more than that could go out past the outskirts of town and find some one who would lend to/borrow from them. Get all the help they could manage to get out there, syndicate and backbite to their heart’s content. Responsible for their own deals. No reserves, no regs, no coercion. Most of all, no federal government financial involvement. ‘Cept taxes, of course. Thing’s would probably slow down a bit, but they’re going to, anyway.

  39. OF COURSE THEY COULD BE RUN TO GIVE NICE DIVIDENDS AND NOT SO MUCH OF A RETURN ON ROE. THIS WOULD HURT CEO PAY THOUGH AS ALL THIS CRAP IS TIED INTO ROE. JUST ANOTHER PROBLEM IN THE SYSTEM AS MONETARY REWARDS SHOULD BE BASED ON ROA FOR EMPLOYEES

  40. “The essential premise of the Morgan Stanley reasoning heard much more widely on Wall Street) is that the size of our biggest banks cannot be constrained – because it would raise the cost of equity for these smaller units. “

    Sounds like a new version of the trickle down effect – what’s good for big banks is also good for small banks.

  41. No, but I’m not sure the electorate understands how those others affected them, unlike this one. And many elected officials believe that this was a once in a lifetime event.

  42. I have to wonder if GS shorted AIG too… If you lay a trap for another company (using private information about your risk and/or asset values that others don’t have), you have private information about AIG’s exposure to that risk, and you short the company… I have to wonder at the legality of that.

    I have to wonder, for example, whether AIG shareholders have a legitimate class action against GS.

    From Timmy G’s perspective, btw, it’s not clear whether he deliberately acted to save GS, or whether he didn’t realize that the entire system was buckling until he saw the GS people raising the alarm. Was Tim G aware of GS’ direct exposure to AIG, or did he simply respond to GS folks who argued vociferously that “If AIG went down, it would be the end of everything.”

    Frankly, I _do_ believe if AIG went down, it would have been catastrophic. It wasn’t just GS, Barclays and many others got paid off, and the psychological impact is impossible to retrospectively assess. So maybe GS simply made a _political_ gamble in going with AIG (rather than relying on collateral posting). The Fed couldn’t let AIG go down, while the monolines weren’t as sacrosanct. Shrewd.

  43. Well, I don’t want to step into something I don’t understand, though I’m sure JK never meant anything personal – he’s one of the most mild mannered and polite web hosts I’ve ever encountered. (This comment section is extremely tolerant.)

    Regarding the Social Security issue, your point is one that has come to be associated with the movement to Privatize Social Security.

    Leaving aside the issue that privatization will create individual variation (and the point of Social Security is to establish a floor, not to create more wealth dispersion), there is the problem of the sheer amount of liquidity in the Social Security system.

    Currently, private funds enter various investment channels – the marginal return on investment is set by the market. If the supply of funds into private channels were to dramatically increase, private investments would see rates of returns drop (in other words, more dollars competing to make the same investments). This would cause a huge spike in the value of assets currently being held (bonds, equities), but a long term low interest rate.

    This would, theoretically, make it possible to invest in lower-return private investments (and decrease the interest rate on savings). But in practice, most of the private sector doesn’t seem to make investments with longer than a 3-5 year payoff even if the interest rate is near zero, so I’m not sure we’d see more longer term investment. (At some point, the inherent risk in long term investments just swamps the slightly lower interest rate.)

    Another effect would be to increase the interest rate on government debt (unless all of the freed up social security funds get used to buy T-bills). Currently, social security is effectively “invested” in government debt. The government invests this by doing things that improve productivity (and, hence, tax revenue)… infrastructure, education, etc. Ideally, stuff that is _public_ infrastructure or generates lots of good externalities or is too risky/long term for private investment. (Unfortunately, we’ve spent a lot of govt debt on subsidizing unsustainable consumption rather than investing…)

    But simply getting government to spend less of our “savings” doesn’t fix the problem unless the private sector invests those savings efficiently (which, of course, requires banks that make good decisions with other peoples’ money… ahem… and that private actors start to make investments with time horizons of 7 to 20 years or more).

    There are many illusions surrounding money. The money that gets saved by individuals is merely a measure of an obligation. BUT at the aggregate level it reflects deferred consumption, where that intertemporal consumption tradeoff is determined by investment (and the technical factors underlying this investment).

    Enter the Baby Boomers. If you have a huge population bulge go from 50 to 70, then something needs to be able to support the 70 year old population in the future. At the individual level this is savings, but at the national level (not accounting for international credit) savings aren’t the issue. The issue is dedicating resources into investments that will make the saved money _mean_ something when the population bulge turns 70.

    FINALLY, there’s the immediate effects of dropping the private savings rate so rapidly. The net effect is to MASSIVELY and rapidly inflate asset prices (e.g. the price of bonds and equities). You would see a _one-time_ spike in those asset prices, achieved through a permanent drop in the private savings rate and a permanent increase in the cost of financing federal debt.

    Anti-govt. folks think this is great. Among other things it “starves the beast”. In practice, privatizing social security right now (without first reducing federal consumption expenditures) is just another massive transfer of wealth from future generations to those people currently holding private assets. The resulting bubble could dwarf the housing bubble, while destroying the credit of the US government (and simultaneously crushing the dollar).

    It’s just like cutting taxes without cutting expenses first – just another way to subsidize current consumption by indebting our children.

  44. “private savings rate” above should probably be “private savings interest rate”

  45. These people are not gamblers!

    They do not play to maybe win. We know this.

  46. Does anyone know of a good lively discussion forum dealing with the debate over reworking the capital adequacy regimes, especially in regards to types of capital, capital levels, regulatory arbitrage etc? Thanks

  47. Morgan is jealous that it hasn’t made enough money to buy Gold Man-Sacks (see link below), and now they are lobbying through any means possible to improve their profitability.

    http://www.thedailyshow.com/watch/thu-november-19-2009/things-not-to-be-thankful-for—silverdome–goldman-sachs—congressional-recess

  48. Hahah, yeah, I was about to say “But… if we separate then where will the bankers get the suckers from?”

  49. You mean exactly what we seem to be trending toward right now?

  50. Screw it. If they’re going to presume that every time they screw up, I’m supposed to bail them out and foot the bill, then nationalize them. If they’re going to just be 100% government funded and guaranteed, then I want to own them. At least then we *might* see action on behalf of the public good rather than knowing we’ll see action only good for an exec’s bonus.

  51. Sounds like the old version in new clothes. Strangely, the clothes seem to resemble the emperor’s…

  52. This is an outrage, pure and simple. Big Finance will fight every reform effort and sooner or later sympathetic regulators will let them have their way. the only solution is to restructure the industry by splitting commercial from investment banking establish size limits and set high employee ownership requirements.

    Can we do this? Not without fanning the outrage on Main St. Americans are angry about Big Finance and the trillion or so dollars the government has pumped in to save it. Those expenditures may have been necessary at the time to keep the world economy from going over the cliff. But now we need a permanent fix and Washington won’t act against it captors without a public groundswell of anger and demands for action. Don’t contain your outrage, direct it where it will do the most good!