Tuesday, November 27, 2018

Financial reform video

Capital, more capital. I did a video interview for the Chicago Booth Review, summarizing a few talks I'm giving this fall. At some point I'll put the talks together in useful form for the blog. In the meantime, the Booth team did a nice job of cutting and splicing to make me sound coherent. 


  1. Great stuff, I'm going to link to this video as something to watch for students in my Financial Markets and Institutions course once we get to the financial crisis. I'm sure at least a couple of them will give it a watch and get a kick out of it.

  2. would that capital be handed to a few privileged recipients of The Federal Reserve and World's Central Banks largess? Seems that many of the worse actors were greatly rewarded in the last go around...resulting in astounding wealth inequality.

  3. Can't get that video to work. Maybe because I'm in the UK??

    1. The image is just an image. Did you click on that, or the link in the text?

    2. I take the point, and I like where you're going, but I'm not totally convinced. Banks are highly levered because the returns to the total enterprise are very low, and they're trying to generate an attractive return on equity. A heavily-equity-financed banking system would either a) generate very, very low returns to equity or b) be much more expensive for bank users than banks are today. The latter has social/economic consequences. If the former applies, however, investors will lever up their equity investments in banks, i.e., they will borrow money to buy the equity. If the bank stock loses value, those loans will be at risk - indeed, if the equity is purchased with margin, there will be margin calls, although I imagine the loans will be a little more sophisticated than that. But, when lenders recognize that the loans are at risk, what happens in the economy then? You've added some resilience, but lost some visibility.

    3. The You tube version might work for you: https://www.youtube.com/watch?v=e29jXdUfcfU&t=3s

    4. Thanks for the help. I can see it now.

  4. Regulations, gaming systems, avoidance, dumb risk taking, etc, all fun stuff.

    Enforcement is in my mind the big issue when it comes to regulations. That, too, has costs -- what's the benefit? If we're talking about stability via capitalization versus enforcement, do increased capital requirements really mitigate future bad decisions and the crashes that follow? Curious.

    When Moody's and their competitors were selling fake bond ratings I doubt anyone cared about capitalization. It was bad information that propagated through the whole system. Triple A ratings that were actually junk to me was a huge failure of the system to police the veracity of the financial instruments. Basically, lying and corruption. And, there was no perceived incentive to self-police. It was literally, "Go on, take the money and run." Then, the credit markets failed and the Fed unfroze it with all its unconventional monetary policy. Let us hope we don't have to do that again.

    It's a simplified view and more was going on behind the scenes. But, bad information and lack of due dilligence causes harm is what I'm getting at.

  5. Certainly the growth of private debt as a percentage of GDP is a source of concern and it should be tracked and managed so increasing bank regulation to reduce private sector debt would lower the economy's fragility.

    But it's preposterous to be worrying about sovereign debt in light of the fact that: A sovereign (Treasury combined with the Federal Reserve Bank), like the US, that:
    a. issues,
    b. borrows in, and
    c. floats
    its own currency, can NEVER run out of cash. so:

    The US government debt is not a problem in any way shape or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Federal Reserve Bank with similar interest and maturities. The similar or even better risk/reward terms assure no change in investor savings/spending preference or desire to hold dollars. Not recommending this course of action, just pointing out that it is possible.

  6. Very good summary by John Cochrane of the basic issues in relation to banks. My only slight quibble is regarding his claim that the capital ratio needs to be 50% in order to dispense with all bank regulators. That clashes with the claim by Martin Wolf and Anat Admati that a 25% or so ratio would do. Perhaps Wolf, Admati and Cochrane need to thrash that one out.

    Re the idea that the higher the capital ratio, the fewer the number of regulators needed, the economics Nobel laureate Merton Miller said much the same. He said, “Think how much national economic welfare would rise under Fisher’s banking scheme when thousands of no longer needed bank regulators (and hundreds of academic banking economists) find themselves forced at last to seek more socially productive lines of economic activity.” (“Fisher’s banking scheme” was Irving Fisher’s full reserve (i.e. 100% capital ratio) proposal).

  7. Perfect timing! I just did my financial crisis lecture with a focus on understanding: A = L + E!

    We'll watch this today in class.


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