By James Kwak
Several people have asked us to comment on Paul Krugman’s op-ed yesterday (both by email and in our bookstore event yesterday), in which he contrasts the Paul Volcker school (“limiting the size and scope of the biggest banks”) with the other school (“the important thing is to regulate what banks do, not how big they get”). Krugman says he is in the latter group. But Mike Konczal* beat me to it:
“For me, it’s not an either/or but a both/and question. I think we should do both (a) and (b), impose a hard size cap of $400 billion to $500 billion and then expand regulation over all the broken-up shadow banks. If you look at the conclusion of 13 Bankers, I think Simon Johnson and James Kwak are in a similar boat.”
The short answer is what Mike said. We don’t think limiting size and scope is a sufficient solution. This is what we say on page 216 of the book:
“To be clear, size limits should not replace existing financial regulations. A world with only small banks, but small banks with minimal capital requirements and no effective oversight, would not be dangerous in the same way as today’s world of megabanks, but it would be dangerous nonetheless; it was the collapse of thousands of small banks that helped bring on the Great Depression. . . . Therefore, enhanced capital requirements and closer prudential regulation, as proposed by the Obama administration, are also necessary.”
We don’t spend a lot of time on the smarter/better regulations because we think they are relatively uncontroversial, and the administration is already pushing for them. We emphasize the size constraints precisely because those are more controversial and the administration is not pushing for them (unless you count the 10 percent limit on bank liabilities, which currently would affect exactly no one, according to the Treasury Department).
We’ve written several times about why smarter/better regulations alone are not enough, but I think the most basic point is simply that regulation always fails — companies always find a way around it — and the costs of failure will be lower in a world with smaller banks than in a world with bigger banks. Yes, it is possible that several smaller banks could act in a way that is highly correlated and essentially mimic one larger bank; but it is not a foregone conclusion that this would happen, among other reasons because the more actors you have, the more likely they are to take differing positions on the market. (I believe the system was safer because Goldman and JPMorgan Chase became skeptical about the housing market around 2006-2007; imagine if there were just one gigantic investment bank, and it behaved like Bear, Lehman, or Merrill.)
So I actually don’t think there’s much of a debate here. Or, more precisely, there is a debate about whether to have size and scope constraints, but you don’t have to pick between size and scope constraints on the one hand and closer prudential regulation and resolution authority on the other hand.
* Yes, that is Mike of Rortybomb fame, although it’s on Ezra Klein’s blog. Mike is guest-blogging for Ezra. I’d like to point out that I was one of the first, though not the first, to recognize Mike’s blogging brilliance; he guest-blogged here last August when we were on vacation.
The Baseline Scenario 
Krugman: “Breaking up big banks wouldn’t really solve our problems, because it’s perfectly possible to have a financial crisis that mainly takes the form of a run on smaller institutions. In fact, that’s precisely what happened in the 1930s, when most of the banks that collapsed were relatively small — small enough that the Federal Reserve believed that it was O.K. to let them fail.”
Kwak: “Yes, it is possible that several smaller banks could act in a way that is highly correlated and essentially mimic one larger bank; but it is not a foregone conclusion that this would happen, among other reasons because the more actors you have, the more likely they are to take differing positions on the market.”
What evidence is there that smaller banks are now taking significantly different positions, enough to avoid a financial crisis?
So Krugman’s hack maneuvers continue. It looks like he’s going for a reprise of his lies about the health racket bill:
1. Claim, according to some unexplained religious fundamentalist faith, that:
2. the same government which has systematically refused to encode serious regulations or enforce even the meager ones it does encode,
3. will now encode serious regulations (and never mind that these regulations don’t look very serious, that in fact they look completely phony; just trust me, Paul Krugman, on my religious authority, these are “real”);
4. and will then enforce them,
5. so we don’t have to break up the rackets.
The NYT’s transformation into a voodoo fundamentalist pamphlet continues apace. But in the interests of journalistic confirmation they really ought to at least provide photographs of the entrails after Krugman reads them. Given his sermons on the health bill, those must’ve been some auspices, some trances, some visions.
What does the Public Editor say about all this?
I agree with the “not an either/or” comment.
Krugman is correct to point out that the Great Depression involved the failure of many small banks. It’s not JUST size that matters. But it does matter. There’s no denying that massive banks pose a threat to the system.
Hey James, if we were to judge your eye for baseball talent based on your eye for financial prowess (Mike Konczal), we’d have to get you a job as a scout for the Red Sox. Though something tells me you might prefer to be a scout for the Boston Celtics.
Closer to the point, I don’t think someone (Paul Krugman) who is on the losing side of a debate he framed much like a child would, with only 2 camps, deserves much of a response. Would you also want to debate George Will on climate control and environmental degradation??? Just let the man enjoy his happy echo chamber.
Krugman claims his editor is his wife. Let’s give her the benefit of the doubt and assume she’s on vacation from the role. If I was her I would tell him to keep that editor title a family secret.
Soon Krugman will write columns praising Geithner and Summers. The guy has been co-opted, as simple as that.
What he says he wants is what the big banks want. The reference to Canada speaks volumes, it could have come from the PR department of JP Morgan.
Of course it is not either/or. Nice someone finally said it.
We are being divided-and-conquered once again, and efforts to rein in the banks are being deflected and diffused. The fact the discussion has been forced into an either/or paradigm tells me the whole reform debate is just a big game. That’s probably the way the red/blue split arose, for that matter. Tea, anyone? Heaven help us then.
Besides the adverse social and economic consequences of banks being too big, there is also the matter of the deleterious impacts social, economic, and environmental impacts of the financial sector being too big a portion of the overall economy. Kevin Phillips, in “Wealth and Democracy,” and other voices crying out in the economic wilderness have pointed this out.
How can the distorting and corrosive effects on an economy and democracy of a financial sector on steroids be mitigated and reversed? Which comes first: financial regulation or campaign finance reform? Indeed, where is the Theodore Roosevelt for today who can face these difficult, far-reaching and inextricably intertwined problems?
The very first effort–still very far from realization–is to strictly differentiate among the following in all discussions:
(a) ordinary commercial banks;
(b) traditional fee-based investment banks and broker-dealers (IPOs, M&A, fee-based structured product creation, “market-making” in securities trades, etc.)
(c) hedge funds;
(d) investment banks acting as hedge funds.
It was the fall-out in category (d) from a category (c) failure that was bailed out with the LTCM crisis. That crisis response (the “Greenspan put”) set the stage for the current one, wherein category(d) was explicitly bailed out. What, other than Fed/Treasury protection as “lender of FIRST resort”, obvious political power, and associated fear-mongering from painting (d) as the equivalent to a 30s (a), differentiates (d) from (c)? No discussion of regulations, of TBTF, or of simply too-big per se can address the issues involved without also elucidating why–or, in actuality w.r.t future bail-outs, IF–(c) will be treated differently than (d).
I never would have thought that Krugman would have been co-opted, but how else to explain his baffling backing away from what just about every other liberal/progressive or just rational person advocates as an essential plank to financial reform: a 21st century Glass-Steagall law separating investment houses (which wouldn’t receive FDIC insurance) from commercial banks (which will continue to). This is the reinstatement of breaking up the big FINANCIAL HOUSES (which now include banks as sub-sets) which worked well from The Depression until its repeal in 1999.
What’s up with Krugman? Can only conclude he has been co-opted, as another commenter guessed ??
Actually, Krugman hasn’t been co-opted, but has simply followed his longstanding path of the partisan hack. People only forgot about his aggressive corporatism under Clinton because of his excellent attacks on Bush and the Republicans.
But he never in fact objected to Bush policies, but only that it was Republicans doing it.
Here’s an example from 1997 of the real Krugman, one of globalization’s most malefic propagandists:
http://www.slate.com/id/1918
We’ve known at least since the experiments of the first half of the 20th century that whenever an ideologue says, “we have to suffer now in order to achieve Utopia twenty years from now”, he’s simply a lying thug.
And so we know that knew at the time that the real goal of “free trade” was to permanently liquidate all good jobs and social stability, first in the Global South and eventually in the Western countries as well. We’re undergoing the end game today.
Since the Dems are for the moment back in power Thugman has fired up his Big Lie Machine again for the final push. Thus we get his playing lead Pied Piper for the “reform” lies, first for health rackets and now for the finance rackets.
Thus we get his acting as chorusmaster for the new round of China-bashing, simply a textbook exercise in one of history’s oldest tricks, lies and misdirection via riling up xenophobia.
(Also, notice how silent he’s gone on Bush’s war now that it’s 100% Obama’s war? But I guess after being considered such a hero on Iraq, even he’s embarrassed to shill for the war now.)
And it’ll be interesting to see how he’ll try to drum up support for the liquidation of Social Security, which is Obama’s fondest dream. They’re all gearing up for it as we speak. It’ll be the consummation of Krugman’s career.
So no, he hasn’t been co-opted. He was Thugman from day one.
What is most urgently needed though is to get rid of all those regulations that helped to turn the big into the too big to fail, whether by the way the capital requirements for banks are set or now by the way how the “too big to fail” are becoming a more and more exclusive club of state protected banks.
But, to know this, you must understand how current regulation work, and as a minimum have read Basel II, but that, as we know, very few have done, at least not Simon Johnson or James Kwak and much less Paul Krugman.
If we go back to the early 1930ies and asked ourselves if all the banks that were failed due to “runs” were in fact unhealthy what would the answer be?
Paul Krugman assumes that the answer is yes – that is why there was a run.
But I don’t think that was the situation. Rather there were unhealthy banks and healthy banks and a loss of trust in all banks and then the massive runs.
I think that when the bank runs started, it didn’t matter if the bank was healthy or not. A run kills a healthy bank.
So … one premise of Professor Krugman’s argument – that the bank runs on small banks in the 30ies demonstrates that they are just as likely a big banks to be reckless may not be based in fact. This is so because it was the loss of confidence in the whole sector that caused the runs – not the health or lack of health of individual banks. Thus, healthy well run banks went down just as unhealthy banks.
Of course, the FDIC now largely protects against this risk.
Mr Kwak writes:
“We’ve written several times about why smarter/better regulations alone are not enough, but I think the most basic point is simply that regulation always fails — companies always find a way around it — and the costs of failure will be lower in a world with smaller banks than in a world with bigger banks.”
Sheesh! Where is it written that the criminals
are always smarter than the police? I believe that
Mr Kwak has a vision of regulation as being
equivalent to “locking the barn door”, but
regulation doesn’t have to be a reactive process.
Which brings me, Johnny One-Note, to my eternal
plea: MONEY IS IMPORTANT! hence the people who
issue it — banks — should be preemptively
regulated. Which means that people like Messrs
Johnson and Kwak, aided and abetted by us rabble
trailing along, should work out a THEORY of what
financial services are necessary to a productive
capitalist society.
Let me at least pose some preliminary suggestions. Lending is preeminently important,
and necessary, but also dangerous. What kinds
should be permitted? I want to be able to at
least apply for a loan to start a business, or
to buy a house. But I don’t want phony loans
to be made in order to e.g. bring down a
government.
Insurance is also very important, but, again,
also dangerous. What kinds should be permitted?
I want to be able to insure _my_ house, and _my_
car. But IMHO credit default swaps are beyond
the pale.
Our criteria in working on this should not be efficiency, or innovation. Rather, it should
be _safety_. A capitalism whose fundamental
processes are _safe_ will surely be more
productive than a capitalism with a huge
financial sector, with scads of “innovative
financial instruments”, which is what we have
today.
I’m neither smart enough, nor knowledgeable enough,
to go further than to mention the above two
categories and possible demarcation points for
their activities. But can’t we all add some
ideas and caveats? This would seem like a
productive use of the Assembled Wisdom gathered
here in baselinescenario.
Best wishes to all,
Alan McConnell, in Silver Spring MD
Everyone knows that allowing giant banks to operate as casinos cannot reliably produce anything but catastrophic failures. The hope is that the failures will be delayed until after the asset bubbles are reinflated to validate a bigger share of the overhanging debt.
In a world of infinite fiat money the game doesn’t necessarily ever end. It just produces increasingly unjustiable anti-democratic consequences.
“We’ve written several times about why smarter/better regulations alone are not enough, but I think the most basic point is simply that regulation always fails — companies always find a way around it — and the costs of failure will be lower in a world with smaller banks than in a world with bigger banks.”
Doesnt your idea of regulating bank size doom itself to its own failure……………………
Please address this.
Clearly, we need both…smaller banks and less leverage. For different reasons…less power and influence through size and less ability to create systemic risk.
It does doom itself to failure if you vote for Senators like Dick Shelby and Bob Corker, who will block ANY real banking reform or real finance industry reform. If you live in Tennessee or Alabama and choose to vote for Senator Shelby or Senator Corker, just wait and see if the large bankers don’t piss down your back and tell you it’s raining.
Mr Kwak wrote:
“We’ve written several times about why smarter/better regulations alone are not enough, but I think the most basic point is simply that regulation always fails — companies always find a way around it …..”
Charles Dickens wrote:
“Subdue your appetites, my dears, and you’ve conquered human nature.”
(1812 – 1870)
“regulation always fails — companies always find a way around it …..”
In this case banks did not even have to find a way around any regulations… they just had to follow them and put up a meager bank equity of only 1.6 percent when lending to anything rated AAA.
In a recent post Krugman writes:
Let me be clear: I would very much like to limit
the size of financial institutions, mainly for
political economy reasons: it’s a real problem when
these institutions start regulating the government
rather than the other way around. But shrinking the
banks is not a solution to the crisis problem, and
the rhetoric of too-big-to-fail is in the process
of being hijacked by people who really want no
regulation at all.
So clearly there is a lot of synergy, however in reverse I worry that by trying to avoid said hijack, Krugman helps kill something that is at least as important. Actually, I think it’s more important – as long as they are big, they have too much power and change/regulation will probably never succeed to any reasonable amount.
As far as arguments that smaller banks are just as risky as big banks, if were to imagine the US having one and only one bank that was highly leveraged, versus 4 highly leveraged banks, which provides the higher risk?
The answer is still one – statistically speaking the odds of one bank failing over all 4 is much, much higher and the damage is much much greater. Additionally you have more options in how you can bail out – for instance potentially allowing 2 two fail while rescuing the other two.
As you increase the numbers the odds just get better, and the ability to respond likewise. So having 16 big banks instead of just 4, is ultimately a much better scenario.
Krugman writes:
“Let me be clear: I would very much like to limit the size of financial institutions, mainly for political economy reasons: it’s a real problem when these institutions start regulating the government rather than the other way around.”
I think is a clear articulation of Krugman’s position, and one which I happen to agree with. I draw a strong distinction between Baseline’s political-economy arguments in the Atlantic article, and the purely-economy moral hazard arguments that seem to dominate the debate. The latter seems to be highly questionable, and Baseline’s response to the Canadian counter-example is not yet convincing.
But there are few people who will challenge the political economy argument – at least publicly. Most regulators (Geithner included) would simply rather not discuss the political-influence issue; it hits too close to home.
I would note that the press for Geithner has taken a favorable turn, as the media now starts to present him as someone who fell on a grenade to save the rest of us.
Canadian-style big banks would not work in the United States. One reason being, in Canada, it is against the law for “special interests” to contribute very large sums of money to a political party or politician.
At a minimimum CDS should only be allowed for the actors involved. Outside groups with no stake in the investment should not be allowed to “bet” on it. Closing the Casino would help in my opinion.
Brings up the issue of the rating agencies and how they interact with the banks.
“That would be denying free speech to those inamimate object financial corporations and is now against our constitution. Modern suffragettes will next be pushing for the IOFCs to obtain full citizenship and voting rights.”
With McCain/Feingold effectively dead and buried the political economy side of the problem has been worsened. A Canadian style law against special interests would now have to take the form of a constitutional ammendment. The chances of such happening with the IOFCs bank rolling the opposition, legally, will make it highly unlikely to happen.
Yes, you two men-in-ties(Mr. Johnson, Mr. Kwak) have been vague, unclear from the beginning on this issue. This is similar to your credulousness and confusion in regards to the so-called long-term deficit problem, which is not in any way a problem. And by taking seriously the long-term deficit “problem” you give political cover to the deficit hawks, who more than anyone else will push the world into a Second Great Depression(if they or you are listened to).
“…the most basic point is simply that regulation always fails — companies always find a way around it — and the costs of failure will be lower in a world with smaller banks than in a world with bigger banks.”
But this is precisely Mr. Krugman’s point, roughly, a bank run against the financial system is still a bank run, even if its against many small banks as in the US in the Great Depression. Yet you fail utterly to give a counter-argument.
“We’ve written several times about why smarter/better regulations alone are not enough, but I think the most basic point is simply that regulation always fails — companies always find a way around it.”
Why aren’t ‘smarter/better regulations’ enough? They were enough in Canada, yes? And Canada had only a few, very large banks and somehow, magically didn’t need a bailout. So this very strong counter-example to your argument, Canada, doesn’t count somehow?
What’s so distressing about this blog, is that in normal times you two would be just another couple of fatuous academics. Unfortunately, for some reason you have a lot of influence. Or on the bright side, maybe you’re not listened to as much as it seems. One can only hope that this is so, and that soon you’ll once again become the anonymous, obscure technocrats you were always destined to be.
Would someone PLEASE explain in concrete terms what they believe would have happened that was worse than what did happen if, say, Citibank or BOA had gone under? What are the probably results in this era of a too-big-to-fail bank failing?
who are you quoting?
The hedge fund that famously blew up a few years ago(LTCM)? Can’t remember the name but it wasn’t a bank and it supposedly wasn’t that big but it caused a crisis. How would you regulate that entity?
Couldn’t agree more. It frankly took me a while to realize it, but ever since Obama is in power, his editorials are almost perfect evidence that Krugman is a cheap corporatist ideologue who used his vitriolic attacks on Bush only as a means for building up a false reputation of upholding true liberal values.
Thanks for the Slate article, good reminder…
Good for Canada is making it illegal. We need a Constitutional amendment (I know how difficult that is, but given SCOTUS….) mandating public financing of campaigns and strongly regulating lobbying and “revolving door” syndrome.
Brings also up the issue of how internationallly based regulations, such as those from Basel, will always favor the activities of big international players when compared to the operations of smaller national banks.
“Would someone PLEASE explain in concrete terms what they believe would have happened that was worse than what did happen if….”
I’ll give it a try with my 2-cents.
Our global monetary system, cash, cheques, credit would have been replaced temporarily with a barter economy relying on payment with, canned food, gold, silver coins, etc. At the time Paulson remarked that corporations globally would not be able to pay their employees through the usual methods.
In other words, chaos, martial law. This is something that the powers-that-be do not wish to dwell upon, otherwise, the citizens of the world might demand a constructive response to make sure this does not happen again. We dodged the bullet temporarily, but the risks of a similar event have increased dramatically. Next time around events may also unfold just as quickly and with as little warning. Don’t take my word for it.
A similar event happened a few years earlier (few people have heard of) involving Long Term Capital.
Rep Paul Kanjorski video interview on C-SPAN (video),
“On Thursday at about 11 o’clock in the morning ( September 18, 2008) , the Federal Reserve noticed a tremendous draw down of money-market accounts in the United States to the tune of $550-billion dollars in a matter of an hour or two… the Treasury opened up it’s window to help… they pumped $105-billion into the system and quickly realized they could not stem the tide, we were having an electronic run on the banks… they decided to close the operation… close down the money accounts… and announce a guarantee of $250,000 per account so there wouldn’t be further panic out there and that’s what actually happened.
Within 24-hours the world economy would have collapsed. We talked at that time, what would have happened, if that happened…it would have been the end of our economic and political system as we know it.
If they had not done that, their estimation was that by 2 o’clock that afternoon, $5 1/2-Trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States and within 24-hours the world economy would have collapsed. ”
This is perhaps the most fallacious part of Krugman’s argument. Can we really say that the Great Depression was caused by the failure of the predominantly small banks itself? Economics 101 points to the state’s reaction to these failures as the main culprit, namely failing to expansionary policies in the midst of the crisis. It’s extremely suspicious that Krugman doesn’t acknowledge this here, being the author of “The Return of Depression Economics.”
Mr(s) abell_ia writes:
“Would someone PLEASE explain in concrete terms what they believe would have happened that was worse than what did happen if, say, Citibank or BOA had gone under? What are the probably results in this era of a too-big-to-fail bank failing?”
And Rickk replies:
“Our global monetary system, cash, cheques, credit would have been replaced temporarily with a barter economy relying on payment with, canned food, gold, silver coins, etc. At the time Paulson remarked that corporations globally would not be able to pay their employees through the usual methods.”
And I am left open-mouthed. What can Rickk possibly
be talking about?
[ one can ask: what would happen should a Super
Terrorist with a giant magnet fly over the
whole world, wiping out all disks and financial
records. That would bring about the apocalypse
Rickk is describing. But that isn;t what abell_ia
is asking ]
Let’s assume: All Banks failing. They are taken over
by the Federal government, putting out a quick
message to us all: “According to law, all deposits
up to $250K are guaranteed already, and we hereby
guarantee the rest. The money you, me, and G.E.
have on deposit in a bank is guaranteed and safe.”
Companies which have to borrow to meet their
payrolls — are there such companies? I’ve never
heard of such — are going to have some difficulty.
And bank employees from tellers on up are going to
have to get used to being federal employees for
a while.
But what else? Mr Rickk, you owe us further
explanation, else we must all think you allied
with Paulson-type fear-mongering. Do you want
this very serious charge leveled at you, in a
public forum?? :)
Best wishes,
Alan McConnell, in Silver Spring MD
Alan McConnell wrote;
“Mr Rickk, you owe us further explanation, else we must all think you allied with Paulson-type fear-mongering. Do you want this very serious charge leveled at you, in a public forum?? :)”
Your question might be best addressed by Rep Paul Kanjorski and his elected colleagues, I’m simply the messenger quoting the Mr. Kanjorksi, with his reference to the “collapse of the world economy”, a term that might have other more subtle interpretations for others. The Baltic Dry Index will have to show stronger metrics before I jump back in. For now I sleep well at night with the odd nightmare of Hank and his financial Bazooka.
I found safe harbor for 90% of my assets 6-weeks before the crash (the rest left in risk capital). I unwittingly adopted a Black Swan strategy before I learned what it was – which is where I still remain. The answer is different for everyone.
“Courage is resistance to fear, mastery of fear – not absence of fear.”
Mark Twain (1835 – 1910)
The pattern seems to be this: He’ll start out dubious; he even said regarding the pending Senate bill that if it turns out a certain way it should be killed.
But he’s already maneuvering himself around. Softening the demand. Lowering the expectation.
Eventually, whatever bag of garbage the Congress agrees upon, he’ll say it’s good enough. (Maybe that you can count on his Dems to “build on it”.) And if necessary he’ll escalate the rhetoric until the wreck is a “great” reform achievement. And he’ll promise catastrophic consequences if the thing doesn’t pass.
That was his flight plan for the health racketeering bill, and so far we’re up to softening and lowering-expectations stage.
And then, as I said, the real test of his mettle, what he’s been preparing for his whole career, just like his master Obama, will be the assault on Social Security.
What happens if all the major banks fail? But first, what is failure? Banks, again as a whole, can no longer have currency runs. Currently, total outstanding currency liability totals run around $850 bn. Lets look at realistic numbers making up $850 bn currency liability. Somewhere around $200- $250 bn of the currency circulates outside the country. The banks have vault cash of around $40-$50 bn. Retailer imprest cash holdings for cash registers must be around the same values… $40-$50 bn. Some currency is in mattresses in the US. How much? Say $50 bn? The illegal domestic economy soaks up a largish amount of currency.
In short, no currency to be had except unissued currency at the Federal Reserve Banks and in the vaults. That is currently around $250 bn or About $750 per capita. Against this, total bank deposits AND shadow system deposits would be subject to runs. How how much is that? It might be $10 trillion domestically. As you can easily see, currency available for a run would be less than 5 % of demands to pay off everyone.
So first off in a massive run you will get a cashiers check to be deposited in another bank or you get nothing. If the state controls all banks this step becomes moot. Obviously, the first state decree would freeze withdrawls. Currency withdrawl would be highly limited and electronic withdrawls would be limited even more severely.
OK what is a failure if withdrawls are rationed? You can take out of one bank but it goes into another bank. At this point, failed banks could readily be recapitalized . Again by decree. All non depositor debt becomes Common Stock. A portion of deposits above insured limits become subordinated/ preferred capital with limits on redemption. The old shareholders get a very junior common stock or are entirely out.
Obviously, extreme exchange and capital controls are put into place. This will create shortages that will require rationing.
Protest either brings the state down or the state ends significant protest. In short, the state must be up to the crisis.
By the way, seizing the banks need not require a lot of state funds just the state power. The Leviathan bares it’s teeth.
Obviously, any systemic seizure would allow normal course of life check and wire transfers etc. Since the money can only be put in the bank hoarding withdrawls and so forth can be monitored. The state operates the system as one big bank until the mess is sorted out.
Mr Rickk, you give Rep Kanjorski as your source. I
listened with reasonable care to Mr K before I wrote
my first message, and I’ve just listened to him
again. I’ve also wikipeded him. He seems to be a
fine fellow. But he doesn’t give the explanation
that I had hoped for. He listens, with apparent
sympathy, to a C-span caller, who seems as far as I
could tell, to be the voice of the country. And Mr
K has to explain his TARP vote, so he gives back the
Koolaid that Paulson made him, and the rest of the
Congress, swallow back in Sept 08. He is explaining
his vote: Paulson had him scared half to death.
As Stiglitz, in his very super book “Freefall”
explains: banks losing out big time is very very
hard on the bankers. But it doesn’t mess up the
rest of the country, the way the collapse of the
auto industry did. (Even in the D.C. area, very
affluent, lots of dealerships have shut down; I
never thought I’d feel pity for a used-car salesman)
I am not sure that I understand totally Jerryj’s
post, but he seems to be agreeing with me. He
makes the valid point that it is impossible for
_all_ banks to collapse simultaneously.
Finally, I remark that I liked your Mark Twain
quote!
Best wishes,
Alan McConnell, in Silver Spring MD
“What happens if all the major banks fail?”
http://en.wikipedia.org/wiki/Chaos_theory
“Long-Term Capital Management did business with nearly everyone important on Wall Street. As LTCM teetered, Wall Street feared that Long-Term’s failure could cause a chain reaction in numerous markets, causing catastrophic losses throughout the financial system. After LTCM failed to raise more money on its own, it became clear it was running out of options. On September 23, Goldman Sachs, AIG, and Berkshire Hathaway offered then to buy out the fund’s partners for $250 million, to inject $3.75 billion and to operate LTCM within Goldman’s own trading division. The offer was stunningly low to LTCM’s partners because at the start of the year their firm had been worth $4.7 billion. Buffett gave Meriwether less than one hour to accept the deal; the time period lapsed before a deal could be worked out.”
Seeing no options left the Federal Reserve Bank of New York organized a bailout of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets. The contributions from the various institutions were as follows…”
http://en.wikipedia.org/wiki/Long-Term_Capital_Management
– more fear-mongering :-(
“After the bailout, Long-Term Capital Management continued operations. In the year following the bailout, it earned 10%. By early 2000, the fund had been liquidated, and the consortium of banks that financed the bailout had been paid back; but the collapse was devastating for many involved.
Goldman Sachs CEO Jon Corzine, who had been closely involved with LTCM, was forced out of the office in a boardroom coup led by Henry Paulson. Mullins, once considered a possible successor to Alan Greenspan, saw his future with the Reserve dashed.”
Here are some links to the Federal Accountability Act. It sets limits on political donations in Canada.
– Corporations, trade unions and unincorporated associations may no longer make political donations to candidates, registered electoral district associations or nomination contestants of registered parties.
– Contribution limits from individuals are now: no more than $1,100* in any calendar year to each registered political party
http://www.elections.ca/content.asp?section=fin&document=index&dir=lim&lang=e&textonly=false
http://www.elections.ca/content.asp?section=fin&document=limit&dir=lim&lang=e&textonly=false
Sorry. That was from myself.
Hey Per Kurowski, I just read this piece about bank capital requirements, the problems with the Basel approach, and possible ways forward, and I was wondering what you thought about it:
http://bilbo.economicoutlook.net/blog/?p=9075
Along with Stats Guy and JerryJ I enjoy your comments here at the Baseline Scenario the most so I want to make sure I understand your objections to the Basel approach (and make sure I understand the way capital adequacy requirements work myself). So here are a few questions. I apologize if some of them seem stupid (I’m a complete greenhorn when it comes to this stuff):
1) Under the Basel accords Capital Adequacy Requirement = Core Capital plus Supplementary Capital divided by Risk-weighted assets. Descriptions of what constitutes “Core Capital,” “Supplementary Capital,” the kinds of assets that banks are allowed to use to satisfy requirements, and their relative risk weights can be found here by scrolling down to the section about the Basel I and II accords (although I’m sure you already know all this):
http://bilbo.economicoutlook.net/blog/?p=8225
So lending and investment constraints on banks are defined as some multiple of the required capital ratio. The larger the numerator the less leverage banks can take on. Is your objection to all this the risk weighted assets part? Would you prefer all asset classes be weighted the same?
2) I’ve thought about it quite a bit, but I am still confused about where the credit rating agencies fit in to all this. Credit rating agencies are supposed to evaluate the credit risk of various securities. My question is does the rating of the credit rating agencies determine whether or not a particular security can be used as an asset to meet capital adequacy requirements and what that asset’s risk weight would be? You would prefer banks conduct their own internal risk management, rather than outsource that responsibility to an outside agency that creates uniform regulatory measures of risk exposure?
That’s all for now. I apologize for the length of this comment. If you’re too busy to respond I understand.
I could write chapters and chapters of comments on this post but let me concentrate on what is the biggest fault of the current capital requirements and which is totally ignored, here there and everywhere, namely that they discriminate against risk.
Yes I would like to see all bank assets having the same capital requirement because that is the only way to correct the biggest fault with the current capital requirements and which is totally ignored, here there and everywhere, namely that they discriminate against risk.
A borrower with an AAA rating is already receiving by means of low interest rate spreads a favourable treatment from a market of capital that, no matter what is said about excessive risk-taking we all know to be fundamentally coward.
But when the regulator discriminate based on their own agenda of avoiding defaults, lay on an additional layer of benefits to what is rated AAA assigning it silly low capital requirements for banks, they are actually pushing the financial markets toward what is perceived at a particular moment by some few rating agencies as having a low risk and thereby, in relative terms putting a penalty on risk.
What happened? Capitals got overly pushed into the subprime safe-AAA havens and which therefore became, naturally, overcrowded and extremely dangerous.
The issue for society is not to avoid default risks, it is to learn to take the right default risks, but this is something that those small-minded scheming regulators of Basel can never comprehend.
Besides, where did regulators get that silly idea that what is perceived as being risky is more risky when we know that makes the financial markets proceed with more care? There has never ever been a financial crisis derived from something perceived as risky… they have all originated from lending or investing that were falsely perceived as not risky.
Look what they done to my bank Ma! ….. They placed 8 percent capital requirements on all lending to my local small businesses and entrepreneurs who give us jobs, and only 1.6 percent on what is rated AAA and even zero percent when lending to an AAA rated sovereigns… when my bank has really no business lending to AAA rated borrowers or sovereigns at all…. Ils ont changé mon bank Ma!