In the Sunday Times (of London) today, Peter Boone and I address what the British authorities can do to break their version of the boom-bust-bailout cycle.
There is a certain amount of fatalism about these issues in Europe. This is misplaced. In the short-term, European policymakers have an important opportunity to diminish the political power of big banks, particularly because peer review – through the European Commission, the G20, and even the IMF – is more likely to have impact there than in the United States.
It’s an open question whether the degree of ideological capture by finance was stronger over the past decade in the US or the UK. But at least leading UK policymakers have started to push back against their banks; in the US, Paul Volcker remains a relatively lonely quasi-official voice.
By Simon Johnson
The Baseline Scenario 
Peer review reviews scholarly work.
A nod’s as good as a wink to a blind bat.
Say no more, say no more, say no more…
Congressman Barney Frank (US) is proposing a 5% risk retention (more ‘skin the game’), with the English (UK) gentleman’s taxing of 50% to rein in those exotic derivatives: http://snipurl.com/tyes2
There seems to be enough blame to go around the globe a few times, but it seems as though free-market principals are being applied disproportionately to ‘Main Street’ while ‘Wall Street’ et al continue to practice the double standard of enjoying those corporate welfare benefits, known more recently as TARP and in some sense, the government-backed subsidy of TALF:
http://www.newyorkfed.org/markets/talf_faq.html
Click to access monetary20081125a1.pdf
Mr. Bernanke said there would be an unwinding of the TALF program as the U.S. economy improves (aka the banks’ balance sheet), and ending at the close of 2009, unless the Fed granted an extension.
The Consumer Protection Act of 2009 proposed by the House of Reps will likely become the “Public Option” in the Senate’s debate over banking and financial reforms – a non-starter for the Senate Banking Committee IMHO. Although having (re)read the proposal, the existing authority structure of the FDIC seems like the more plausible path for improved regulations; at least the noble effort of taking away some of the cozy alliance between the Federal Reserve – Wall Street – Congress – The White House. Although, you are right about the hazards of Congress’s efforts to try and micromanage the Federal Reserve, however, some demand for increased transparency and accountability should still be a part of the mix, moving forward:
http://snipurl.com/tyeu4
Beth, 5% risk retention is better than nothing, but it’s still not enough. Up-front profits from fees go to the originators, and can cover a very high fraction of expected losses on that 5%.
Consider, for example, if originating margins are 1.5%. Then losses can go to 30% (1.5 / 5) of the loans before it becomes more profitable for the originator not to lend. That’s a continuing invitation to make bad loans.
Mission Impossible!!! … a la Gamelan from Indonesia.
Have the IV drip ready for Volcker in case we finally throw out the basturds.
The UK and US will continue to be in various denial states, for little can be done to reform their advanced capitalist systems.
“There should be an agreed international size cap (for example, $500 billion for boring, relatively safe banks; lower for more risky banks).”
The US/UK financial capitalists are likely to refute the limit you suggest by (also) arguing that the Chinese won’t abide by such rule, or if they do it makes no difference because the Chinese state is still behind them all.
Going beyond/aside, along the lines of some international agreement, how likely is for us to adopt something like Bancor? In its absence, if globalization were to continue, is it possible to protect a reserve currency from the excesses of the democracy of its issuing state?
http://imotion.blogspot.com/2009/11/can-reserve-currency-be-protected-from.html
Yeah, by the way, who is the Tonto to Volcker’s Lone Ranger (at least with his stature)? At this point, we would almost be better off with Greenspan, after all, it seems that he and Volcker agree on the counter measures necessary (including the view that markets are truly not self regulating: Duh!!).
…great rendition of the television classic.
Many of the loans were packaged to ‘sell’ to the secondary market, even if that meant taking hits on pricing from the buyer (such as Countrywide). Any immediate financial reward out-weighed (no matter how small) the downside of risk (Greenspan’s ‘irrational exuberance’). Yield Spread Premium (aka origination fee/your mortgage broker’s earned commission) is on the settlement sheet, line 801 or near there – rebates to the lender if certain mortgage programs were peddled (via points charged). APR means what the P&I plus closing costs (fees) are for the consumer–expressed as an annual percentage rate, not your amortized monthly payments, as lenders cannot legally include the fees as a part of the note’s principle and interest—-I should hope so…..
Thanks Beth. I am creating an animation of the front cover of Akerlof and Shiller’s book Animal Spirits :) My first venture into animation. I thought I might use this music (great wild animal sounds) and another version with Mozart’s Reqiuem.
Lot’s of energy in the music … and dare I say fun. Theme song for a revolution? The good guys always win at the movies.