tag:blogger.com,1999:blog-582368152716771238.post776415039552806328..comments2024-03-28T02:34:12.891-05:00Comments on The Grumpy Economist: Anat Admati profile in the New York TimesJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger40125tag:blogger.com,1999:blog-582368152716771238.post-25730468291654911762016-10-05T06:16:17.109-05:002016-10-05T06:16:17.109-05:00I am really curious about her. It seems that when ...I am really curious about her. It seems that when she talks, everyone stop to listen and pay attention to what she is saying.Craig E. Mathershttp://simplefastmortgage.com/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-47493795946066973872016-03-23T10:16:05.410-05:002016-03-23T10:16:05.410-05:00"Look for the usage 'banks hold capital&#..."Look for the usage 'banks hold capital' in the vast majority of financial press, including newspapers that should know better, for a sense of how pervasive this fallacy is."<br />It's not just the financial press... <br />https://www.sec.gov/News/Speech/Detail/Speech/1370540629644<br /><br />"In all seriousness, though, there’s been a great deal of attention paid to regulatory capital recently, including new Dodd-Frank requirements, Basel III implementation (or non-implementation) issues, and even bipartisan Congressional efforts to raise capital requirements for large banks.[1] Almost all of that attention has naturally centered on the question of how much capital a financial institution should be required to hold." -- former SEC commissioner Daniel M. Gallagher (Jan. 15, 2014)Jake Symahttps://www.blogger.com/profile/01060988208814265872noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-20759391894025346382014-08-29T04:25:21.739-05:002014-08-29T04:25:21.739-05:00"In the following years, my own thinking, and..."In the following years, my own thinking, and I think that of many economists and agencies especially including the Fed, shifted... The larger consensus has shifted away from clever schemes for convertible debt, farsighted benevolent regulators, and any faith in resolution, to capital, just more capital."<br /><br />True, but sad. Academics and bureaucrats have given up, while bankers are discredited. The dialogue has broken down and we are now seeing certain unintended consequences.<br /><br />I would offer five observations:<br />1. It's best to manage risk, not capitalise its consequences. Driving lessons, the Highway Code and traffic cops are better than just plain old "lots more airbags" or titanium crash helmets. By all means, let's have lots of capital, but we can't ignore the role of good risk management, no matter how difficult that might be to a tidy mind.<br />2. We need a home for cash deposits. Certain creditors view their cash as "on deposit" rather than an investment in a bank. Either it's guaranteed by the state or it's volatile and flighty. Unfortunately, many MM-type theories ignore this behavioural constraint. Banks -- unlike corporations -- can't be 100% equity financed. If they were, deposits would end up in money market funds, which are quasi-banks and systemically unstable.<br />3. New developments -- such as ensuring that reg-cap instruments are truly loss absorbing -- are getting over the massive implicit subsidy of the banking sector and ensuring that there's more "capital at risk" in the system. So long as this capital is permanent ("bail in" of senior short-term debt doesn't work, I'm afraid), then this is progress. <br />4. The growth in shadow banking is worrying. P2P and similar new phenomena are prone to problems that will have systemic consequences. We cannot simply allow the leveraged side of banking (whereby deposit-like funds are put to use in loans) to migrate outside the regulated industry -- though this is happening today.<br />5. OVERALL, we need a decent amount of leverage in the banking system and really good risk management. "More capital" as a mantra is simplistic and reckless.Adrian Dochertyhttp://www.amazon.co.uk/Adrian-Docherty/e/B00GOPRWBU/ref=dp_byline_cont_pop_book_1noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-55628912431869688532014-08-18T11:33:28.111-05:002014-08-18T11:33:28.111-05:00John,
On banks "holding capital" see th...John,<br /><br />On banks "holding capital" see this speech from Alan Greenspan (1998):<br /><br />http://www.federalreserve.gov/boarddocs/speeches/1998/19980226.htm<br /><br />"Nor should we require individual banks to hold capital in amounts sufficient to fully protect against those rare systemic events which, in any event, may render standard probability evaluation moot. The management of systemic risk is properly the job of the central banks. Individual banks should not be required to hold capital against the possibility of overall financial breakdown. Indeed, central banks, by their existence, appropriately offer a form of catastrophe insurance to banks against such events."<br /><br />What Greenspan is saying is that in the event of overall financial breakdown, the central bank exists as lender of last resort.<br /><br />What Greenspan does not mention is that not all financial institutions have access to the Fed's discount window, and so the central bank may not be able to ameliorate a financial crisis through discount window lending if the crisis exists beyond the reaches of central bank influence (shadow banking).<br /><br />Also, a systemic crisis may have fiscal origins where solving it puts the central bank's independence at risk.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-40657929723126891542014-08-11T18:19:23.936-05:002014-08-11T18:19:23.936-05:00There are ways to make the system less run-prone w...There are ways to make the system less run-prone while *increasing* the supply of money, but not everyone agrees that this is necessary or that there is a potential shortage. Prof. Cochrane has a proposal for monetary reform, which he believes will produce an adequate supply of money. His way to protect the system is by making individual banks immune to runs, which clearly prevents a run on the entire system.<br /><br />Admati directly addresses your concern about the supply of money in her "Flawed Claims" document which she updates occasionally and posts frequently. You can find her comments easily by searching the document for "money". I think that she points out that less leverage results in greater money-like properties for bank stock. Cochrane has made similar observations on this blog: now that we have continuous price-discovery via high-frequency trading, we might be able to use bank stock for retail payments, especially if banks are not highly-leveraged. He has a paper from 2002 on "Stocks as Money: Convenience Yield ..."Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-30505322705147873882014-08-11T17:14:31.930-05:002014-08-11T17:14:31.930-05:00Anonymous,
I presume you are referring to this:
...Anonymous,<br /><br />I presume you are referring to this:<br /><br />http://www.nytimes.com/2014/04/13/books/review/fragile-by-design-by-charles-w-calomiris-and-stephen-h-haber.html?_r=0<br /><br />"On the other hand, the government often finds itself in a somewhat equivocal position when it comes to banks. For it is itself a big borrower and always in need of financing. Where better to turn to than the banks? In many countries, banks were originally licensed during the 17th and 18th centuries precisely so that financially pinched governments could raise money — the two most notable instances being the Bank of England and the Banque de France. To this day banks remain not only a tempting source of cheap funding for governments but also, increasingly, vehicles for channeling politically motivated loans at subsidized rates to important constituents and special interests. There is ultimately no way of getting politics out of banking."<br /><br />The way you get politics out of banking is by getting government out of the borrowing business - that means one of two things:<br /><br />1. Balanced budget for good times and bad<br />2. Government sells equity<br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-42096383893869745532014-08-11T16:43:14.678-05:002014-08-11T16:43:14.678-05:00Do you know why Charles Calomiris is critical of A...Do you know why Charles Calomiris is critical of Admati's drive for more common equity at banks? <br /><br />And if the banking system (regular and shadow) produces "money," won't the drive to make a system less run-prone also reduce the money supply? Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-48892290332321106712014-08-11T14:19:22.147-05:002014-08-11T14:19:22.147-05:00John,
You are missing something very important he...John,<br /><br />You are missing something very important here - money is fungible. Company does the following:<br /><br />1. Obtains $5 million is short term funding through commercial paper<br />2. Obtains $5 million in funding through sale of equity<br />3. Makes $5 million in long term loans<br />4. Builds a new building for $5 million<br /><br />Prove that the money borrowed short term is the same money that was lent long term.<br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13836763573950972562014-08-11T14:13:58.256-05:002014-08-11T14:13:58.256-05:00OK, I agree. Thanks for the response!OK, I agree. Thanks for the response!CAnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-85587530003633988542014-08-11T13:59:05.639-05:002014-08-11T13:59:05.639-05:00Right. So as we massively stiffen bank capital, we...Right. So as we massively stiffen bank capital, we also have to say that nobody gets to issue large amounts of short term commercial paper or similar run-prone securities in order to finance, say, mortgage-backed securities. That takes some regulation, yes, but orders of magnitude less than the Dodd-Frank army. See "toward a run free financial system" on my webpage for details of my answer to these questions. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-54359483719701431102014-08-11T13:54:21.549-05:002014-08-11T13:54:21.549-05:00Increased capital requirements would not prevent a...Increased capital requirements would not prevent a bank from running itself into the ground. It would limit the government's involvement in dissolving the company.<br /><br />Increased capital requirements will not solve too big to fail. Even if a company is funded entirely with equity, it can still make bad business decisions.<br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-40735479372854239402014-08-11T13:48:38.965-05:002014-08-11T13:48:38.965-05:00Anonymous,
"So whoever buys debt takes the r...Anonymous,<br /><br />"So whoever buys debt takes the risk of inflation with it I guess."<br /><br />Domestic buyers take the risk of inflation, global buyers take the risk of currency depreciation - not exactly the same thing. Both buyers are implicitly protected (on a nominal basis) by the U. S. Constitution.<br /><br />"That's an important topic but not directly related to implicit government guarantees on private entities debt."<br /><br />It becomes directly related when private debt is converted to public debt - see: <br /><br />http://www.federalreserve.gov/releases/z1/Current/<br /><br />Go to page 19 of 167. In 2008 there was 6.3 Trillion of federal debt and 17.1 Trillion of financial sector debt. Now there is 12.3 Trillion of federal debt and 13.9 Trillion of financial sector debt.<br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-26525613287595979412014-08-11T13:44:20.731-05:002014-08-11T13:44:20.731-05:00Anonymous - a run in the shadow banking sector can...Anonymous - a run in the shadow banking sector can have such large economic consequences that the government has to step in and buy the shadow banking commercial paper even though there is no legal obligation on the government to do so. The Commercial Paper Funding Program is an example. The government suffered no losses but certainly took on significant risks.Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-24323542789684742842014-08-11T13:16:21.830-05:002014-08-11T13:16:21.830-05:00Well, if you look at developing countries with hig...Well, if you look at developing countries with high inflation history, they cannot issue long term debt in their currencies. (Not because its forbidden but because noone will buy it)<br />So whoever buys debt takes the risk of inflation with it I guess. Thats an important topic but not directly related to implicit government guarantees on private entities debt.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-15289273835220800382014-08-11T11:57:24.571-05:002014-08-11T11:57:24.571-05:00So how effectively would higher capital requiremen...So how effectively would higher capital requirements for banks have curbed the warehouse lending that contributed to the proliferation of subprime lenders prior to the crash? Would it have prevented Bear Sterns from issuing commercial paper to finance large purchases of mortgage-backed securities backed by these loans? Now, I am not necessarily against raising capital requirements for banks, but like others have pointed out, I am concerned that financial institutions will simply circumvent the requirements by expanding their shadow banking activities. And this may be even more dangerous.CAnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29727659192146053832014-08-11T11:48:33.938-05:002014-08-11T11:48:33.938-05:00Ralph,
You fail to make the distinction between b...Ralph,<br /><br />You fail to make the distinction between banks and shadow banks whereby the latter can only impose its losses on private capital contributors, and not the government in any conceivable way.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-90520676012054513952014-08-11T10:52:41.503-05:002014-08-11T10:52:41.503-05:00"What is a bank?"
Good question."What is a bank?"<br /><br />Good question.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-63514709515963361742014-08-11T10:06:56.639-05:002014-08-11T10:06:56.639-05:00It seems that we assume a bank's investment de...It seems that we assume a bank's investment decisions are going to be unrelated to the way it is capitalized. I'm not sure that's a good assumption. If you regulate a more conservative capital structure you could find bank management opting for a more risky, and higher return, investment strategy as a means of offsetting the seemingly lower regulated returns.Jhttps://www.blogger.com/profile/09979359620409867963noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-91810042150173859722014-08-11T08:04:05.552-05:002014-08-11T08:04:05.552-05:00Anonymous,
The guarantee comes from the 14th Amen...Anonymous,<br /><br />The guarantee comes from the 14th Amendment to the Constitution. A good article on it can be found here:<br /><br />http://www.theatlantic.com/politics/archive/2011/05/our-national-debt-shall-not-be-questioned-the-constitution-says/238269/<br /><br />This has the ability to create a conflict between monetary policy and fiscal policy. Monetary policy wants to set an interest rate, but heavily indebted government does not collect enough tax revenue to make the interest payments on the debt.<br /><br />The question is - should the central bank bail out the federal government?<br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86890158960312844352014-08-11T03:51:47.547-05:002014-08-11T03:51:47.547-05:00Eric Falkenstein,
I agree that Dodd-Frank is far ...Eric Falkenstein,<br /><br />I agree that Dodd-Frank is far too complicated, and same goes for the UK equivalent: the so called “Vickers” set of rules, which I’ve looked at in detail. Plus you are right to say that much higher capital requirements solve the problem, and that that is beautifully simply by comparison. Personally I back full reserve banking, that is a 100% capital requirement (as advocated by Milton Friedman, Laurence Kotlikoff and others).<br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86625483196854772612014-08-11T03:43:50.743-05:002014-08-11T03:43:50.743-05:00Green,
There is a simple solution to the “moves a...Green,<br /><br />There is a simple solution to the “moves activity to other areas” problem: regulate the “other areas”. Indeed, it’s totally absurd to impose rules on regular banks while not imposing the same rules on shadow banks, given that the shadow bank industry is almost as large as the regular industry. As Adair Turner (former head of the UK’s Financial Services Authority) put it, “If it looks like a bank and quacks like a bank” it should be regulated like a bank.<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-15801865817506424292014-08-11T02:39:12.123-05:002014-08-11T02:39:12.123-05:00I always say, KISS, or Keep It Simple Stupid. This...I always say, KISS, or Keep It Simple Stupid. This is doubly important in government tax codes and regulatory policies.<br /><br />Complexity, by tis nature, is undemocratic, and usually mystifying. Behind the cloaks of complexity, a thousand sins or omissions can occur.<br /><br />So I like the simple capital solution. <br /><br />Okay, but should all banks by regulated to have 100 percent equity? Or just banks that want FDIC insurance? <br /><br />If I say. "I am not a bank," but I borrow money at 4 percent and lend it out at 7 percent, what then? Suppose I end up with trillions on both sides of the ledger? Still, not a bank? What is a bank?<br /><br /><br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-15768888248433061892014-08-11T00:26:20.847-05:002014-08-11T00:26:20.847-05:00Are we sure that householders aren't systemica...Are we sure that householders aren't systemically important? Sure, in general defaults by homeowners are not correlated, so why would we care if a few go bankrupt. But if 30% of homeowners all go broke at the same time (maybe due to a bubble), that'd be pretty systemic?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-52188939726720438712014-08-11T00:18:01.974-05:002014-08-11T00:18:01.974-05:00Agree, but who will lobby for that?Agree, but who will lobby for that?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-42361583056795442742014-08-11T00:16:37.695-05:002014-08-11T00:16:37.695-05:00"Is the federal government "systemically..."Is the federal government "systemically important"? If so, should it rely on equity instead of debt financing?"<br /><br />Since there is no federal government to bail out the federal government, there is no implicit guarantee on federal government debt.<br />Anonymousnoreply@blogger.com