The Politics of Intellectual Fashion

By James Kwak

Update: See bottom of post.

For years now, Anat Admati has been leading the charge for higher capital requirements for banks, especially large banks that benefit from government subsidies, first in a widely cited paper and more recently in her book with Martin Hellwig, The Banker’s New Clothes. Admati’s great service has been clearing the underbrush of misunderstandings and half-truths so that it is possible to have a debate about the benefits of higher capital requirements. Yet even after all this work, the media (and, of course, the banking lobby) continue to repeat claims that are simply false or highly misleading.

In another effort to beat back the tides of ignorance, Admati and Hellwig have put out a new document, “The Parade of the Bankers’ New Clothes Continues,” which catalogs and addresses these claims. In the simply false category, the most common is probably that capital is “set aside”; in fact, banking capital is assets minus liabilities, and the capital requirement places no restrictions on what a bank can do with those assets.

In the highly misleading category is the claim that higher capital requirements would force banks to reduce their lending. Banks can respond to higher capital requirements by raising more equity capital or by reducing their balance sheets. As Admati and Hellwig write, “If increased equity requirements cause banks to reduce their lending, the reason is that they do not want to increase their equity.” (If they can’t sell new shares, then they have more fundamental problems and probably shouldn’t be in business.) And why don’t they want to increase their equity? Because executives have one-way compensation packages based on return on equity, which is not adjusted for risk, so they don’t want to increase the denominator.

As Admati and Hellwig no doubt realize, this is not a battle that is going to be won solely with truth, light, and logic. The banking lobby has a vested interest in sowing confusion, with masterpieces like the IIF’s “report” claiming that higher capital requirements would shrink the global economy by 3.2 percent. And as long as bankers say that such-and-such a regulation will hurt growth and kill jobs, they will get a hearing. Ultimately, it’s all about politics, which was roughly the message of 13 Bankers. (Which is another reason why, in the long run, the only things that matter are campaign finance reform and early childhood education.)

Update: Banks’ unwillingness to increase equity by selling shares (or by not doing buybacks and dividends) is not simply due to one-sided bonus packages tied to ROE. A perhaps more serious problem is that of debt overhang. In short, if a company already has a lot of debt and its solvency is in question, shareholders will be reluctant to put more equity into the firm. That new money would mainly provide greater security to creditors, increasing the value of the firm’s debt, without providing much benefit to equity holders. So in this case, it’s not just the bank’s managers who resist selling new shares; they are actually doing so in the interests of shareholders (but not society). (For much more, see this paper by Admati et al.).

There are two solutions to this problem. First, if the bank really is insolvent, it should be shut down. Second, if it isn’t, regulators could force the bank to retain its earnings rather than paying them out in dividends and buybacks; over time, that would increase the amount of equity in the firm. Creditors could also refuse to lend to a bank that is too highly leveraged—but in the case of systemically important banks, creditors don’t really care, because they know they will be bailed out in a crisis. (That is undeniable, even for people who think that managers and shareholders might not be bailed out.) 

20 thoughts on “The Politics of Intellectual Fashion

  1. All that the vested interests require is some reasonable-sounding cover for not lowering capital requirements. All the legislators need is cover. And they both have enough. Frankly, simply claiming over and over that it would harm growth and jobs would be enough — even without the data. Noise.

    What seems to be lost is that citizens can voluntarily shrink the size of the Big 6 without relying at all on a bought-and-paid-for government. Citizens can secure the safety of their own financial system and protect themselve from a TBTF policy that may end up costing them and children enormous future taxes (either real or through inflation).

    JPMorgan, BofA, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley. Bank and Invest Eslewhere. Divest until they are of such size that they would be allowed to fail.

  2. The new document here which clarifies many issues is a great document. And I must say that the biggest favor Admati and Hellwig are doing is daring to put the force of their academic prestige behind some real truths that need to be told… like when in Flawed Claim 15 they write “the studies that support the Basel III proposals are based on flawed models and their quantitative results are meaningless.”

    That said, their analysis of capital requirements is based almost exclusively from the angle of making the banks safer, and not from the angle that wrong capital requirements, like the current ones which are based on perceived risk, can distort bank lending to such a degree that it can endanger the whole real economy.

  3. @Per – following the circle jerk of FIAT $$$$ distribution once it is all sucked out of the real economy MUST include this on top of crap like the Patent Assertion Entity:

    When you watch the psychos on CNBC, the safe and mature retirement funds in Big Pharma for the handful of LYING executives who cheapened manufacturing until black particulates in injectables are ignored by the drone slaves who can’t speak or write English (perfect excuse for not writing a quality control report) DEPENDS on shutting down RESEARCH Departments and FIRING every ethical scientist that ever walked this planet. And that’s not enough, so enter the IRS to paw through people’s health records to figure out how you paid for medical attention and if the PHARISEES rules were broken – did NOT buy private for profit health insurance to pour 6K to the mafia protection racket planted now in between the doc and the patient? Here’s your FINE.

    So good point – what do you masters of the universe consider *risky*…?

    Good to know that BILLIONS of dollars of salary ripped out of the Honest Labor pool (AKA taxes) since Kennedy was shot decided that maintaining and modernizing infrastructure meant building a STORAGE center for my Facebook photos that people like Anonymousy can access as a PREDATOR with all the cash….I feel so safe now.

    Without an interesting PLAN to beat the swords back into ploughshares, every day is a day walking amongst the most BORING nihilistic narcissists gazing at their navels that are doing astrology charts as analysts for “Anonymousys” at the NSA. It’s like being in a mental institution and that is not what the best and brightest in the 20 somethings signed up for when they were born.

    Glad Putin finally lost his patience :-)) Someone did not read the personality profile – “…does not take to being scolded by puerile self serving nihilistic narcissists”….

    Everyone ganged up on Hitler…..never in the history of megalomania and tyranny does the dude who takes the pre-emptive shot walk away with the prize….

    check out the psychoprofile of the 480 USA citizens worth a collective total of 2.08 trillion – every single last one a sycophant of the “devil”….BORING…as is listening to this 5+ years of yaddayadda about maintaining the suck up machine of the FIRE sector…

    May the wind be at your back when you cross that ol’ bridge…

    Since money no longer is a symbol of the 5000 cattle – might have to herd them up and parade them through the banksters office so he can count ’em himself….

  4. If banks are capital constrained, rather than reserve constrained (keep in mind many countries these days don’t even have reserve requirements) than this entire analysis is wildly inaccurate. The thinking is actually quite simple, is the cost of capital higher than the cost of reserves? The answer, especially if capital requirements are raised, is yes for almost all financial institutions (again, most do not even operate with reserve requirements).
    Raising capital requirements increases the cost of capital that must be taken into consideration when making a loan. This raises the economy wide interest rate and is contractionary monetary policy. Contractionary monetary policy in an environment of deficient demand is terrible public policy. Come on people, this isn’t rocket science.

  5. @Donna – good question about why early childhood education….

    Here’s one opinion:

    There is a big difference, philosophically, between the sexes in how to RAISE a human being.

    Meanwhile, with the corporatization of education, Med school students are graduating without being allowed to study a big wad of “known” irrefutable science regarding teratogenic effects. Maybe because someone got sold the story that with drugs you can up the IQ of your kid – even though the teratogenic data proves otherwise?

    Union of Ethical Scientists who can’t get fired for telling the truth is a very real necessity in the “Now” because it is the critical “labor” battle of the 21st century. A shareholders vs. talent battle…

  6. A scientist is nothing but a failed engineer, proved too. And the mental health field is a never ending battle within itself, much like religions are, there is no logical ending. As is there is no current logical ending for the female body. It’s pick your pain, one way or the other, and go to war over the whole misunderstood philosophical thing, when it don’t work out for ya. We know this story, but tell it to us, just one more time.

  7. I know this much – a Roosevelt, a Stalin and a Churchill brought down a Hitler.

    You got 3 Empires gunning for you, Anonymousy. Looks like your education won’t help your gene code survive.

  8. Soprano dropped dead at Age 51 – I’m already eternal, MouseTurd

    I finally got that little red dot centered right on your forehead…saudistic cretin…

  9. You do seem to have that one track broken mind. You’ll be joining your soprano friend before to long, as you are sold down the river when the time comes. And it also seems you are more the predator with that last statement, as at the same time you shout at others for doing the same (supposedly) to you. We call that hypocrisy, and you are full of it, and have yet to pay the consequences of it all. It will be a much kinder planet with the elimination of hypocrisy, arrogance, and yes, greed. All 3 of which you are guilty as sin of committing.

  10. When the “annies” are out of time – mouseturd will be the one who gets blown up…EVERYONE has the right to make their lives less miserable through HONEST WORK – and I have the right to use whatever force is NEEDED to protect my LIFE. Get it?

    3 empires gunning for YOU – even Putin showed more heart by asking – “…are these the people you want to support?!…” Guess mouseturd can make the case that cannibals aren’t “hypocrites”….

    70% of Russians support Putin
    Saudistas and Zionists IGNORE 70% of USA people saying “don’t go there”…

    you do the math…

  11. You’re crazy annie, what are going to do? Pull a pickle from your ass and try to serve it to me for dinner?? We did that baby, it lead no where, for you that is. You spend more time scrounging for food than you produce in energy, it’s UNSUSTAINABLE YO BITCH.

    Here, I wrote some songs just for you, (and your like minded cohorts), just for now. I had to pay the dudes to sing it cause I don’t sing that well, being a women lover and all that toungin thing that goes with it. But ya, bring it on honey.

    I couldn’t get her all done in one though,

    so it looks you’ll have to press the click button twice.

    later ye all, I need some pizza right now.

  12. No one on the planet has a clue what you are babbling about MouseTurd.

    If you know anything at all about me, my finances, my life – ANYTHING at all outside of this stalking YOU started on this 5 year long babbling INANE website, in the final analysis (more 180 positions than anywhere else on the internet) – then YOU GAINED THAT INFORMATION ILLEGALY and there will be stuff shoved up your ass for it, that is a FACT. Is that clear?

    I am the only person who has walked the razor edge between becoming an ass’ole myself or being demolished by one – so whatever you THINK you know, you DON’T.

    3 EMPIRES gunning for you, and 500+ million guns in USA – you are a walking dead even with all that fiat $$. May you pizza dough be made with Gowanus Creek water. I have a 100 page stat analysis that proves it will cure cancer and I just sold that *idea* for 1 billion more than what the Brookings Institute gay boyz got to review their metadata to figure out who did who’s ass…

  13. Oh i’m scared, aint you boys scared?
    And you can’t cure NOTHIN, not now, not ever, chicky. I gargle with rubbing alcohol after every response to your dirty tricks, is that clear enough for ya?? Don’t make me send mousy after you, he and bruno will shake down your wallet until either you, or it, falls apart at the hypocritical seams. You are an unsustainable Greek tragedy which has no logical ending.

  14. @mouseturd – the surgeon who is part of the circle jerk with rehab/nursing homes has a lifestyle that depends on the # of amputations he can pull off. Yeah, I did CURE what he wanted to chop off of Grams – but then ass’oles like you burn women at the stake for being a witch if they cure, right?

    USA is DEFINITELY not the only game in town, as a matter of fact, it’s the land of DELUSION and outright MALICE when it comes to health care – like private, for-profit health insurance ain’t a mobster protection racket run wild, and now you’ve got the IRS’s busybody babushkas pawing through medical records to create a new circle jerk of FRAUD and embezzlement – AKA “health care” in USA since the first limey died of rickets because the cost of the limes was more than he got paid…

  15. ooops, scurvy, not rickets, although the limey sailors also came no where near to getting paid a wage that could allow them to have a cow :-)) – that’s why they were on the sailboat heading to the “americas” to find gold…

    the more *technology* advances, the more it stays the same – no money for limes or milk (being paid not to produce it, even, if you are a landowner)

    and rickets from being chained indoors to a computer…

    Happy Summer Solstice!

  16. In the UK I would certainly say that most of the major banks (Lloyds, RBS) have little opportunity to increase their equity at the current time. The UK government own the majority of these banks after bailing them out. As they are put under pressure to improve their capital base they do it by reducing “riskier” lending. This is despite getting cheap money from a government wanting an increase in lending.

    It may be possible in the long term under different conditions but at the moment equity is not an option.

  17. Thanks for sharing this information

    Yogi Sriji is an enlightened spiritual leader; founder of Trikarana Yoga Charitable Trust and Trikarana Transcendental Meditation (TTM) Center, a unit of the Trust, started in the year 2009 in Coimbatore, an Industrial City in Tamil Nadu


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