tag:blogger.com,1999:blog-582368152716771238.post6270292185472162039..comments2024-03-28T14:41:03.793-05:00Comments on The Grumpy Economist: Cost-Benefit Analysis for Financial RegulationJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger26125tag:blogger.com,1999:blog-582368152716771238.post-21196684980430842102014-03-05T07:08:33.658-06:002014-03-05T07:08:33.658-06:00"But what if an auction does fail?"
If ..."But what if an auction does fail?"<br /><br />If an auction does fail, then trying to get the federal government to force banks to fund lending operations through equity issuance becomes a farce. The federal government has cut off its nose to spite its face.<br /><br />"All that happens is that the auctioneer or issuer of the shares or bonds has to go away and think again: perhaps they can offer a higher rate of interest on the bonds, or perhaps not."<br /><br />Or perhaps the auctioneer (federal government) will decide not to require banks to fund lending through equity issuance, which brings you back to square one.<br /><br />I understand your points on government issued money, but that diverges from the point of John's original article.<br /><br />Let me suggest this instead - federal government sells equity.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-6500493391097842612014-03-05T03:31:04.984-06:002014-03-05T03:31:04.984-06:00But what if an auction does fail? It happens all t...But what if an auction does fail? It happens all the time (both with public debt and privately issued shares and bonds). All that happens is that the “auctioneer” or issuer of the shares or bonds has to go away and think again: perhaps they can offer a higher rate of interest on the bonds, or perhaps not.<br /><br />Also, in the case of a country that issues its own currency, the whole business of getting private banks to supply government with money is a farce, given that the relevant government (along with its central bank) can print money in infinite quantities anytime. <br /><br />The rules and regulations in some countries may prevent government doing that, but that’s just rules and regulations. That’s technicalities. As far as ECONOMICS goes, there is nothing wrong with a system under which ALL MONEY is issued by the government / central bank machine and private banks are prohibited from creating new money. Indeed that sort of “only government issues money” characteristic is actually inherent to the system advocated by John Cochrane in his Hoover article (though I’m not sure whether he realises it).<br /><br />In contrast, other advocates of that sort of system are very explicit about the only issuer of money being government: in particular Milton Friedman and Positive Money. For Friedman, see: <br /><br />http://ralphanomics.blogspot.co.uk/2014/01/milton-friedman-set-out-positive-money.html<br /><br />Lawrence Kotlikoff also advocates the above sort of system, though I’m not sure whether he (like John Cochrane) has cottoned onto the fact that his system would put an end to private money creation. See: <br /><br />http://www.bloomberg.com/news/2013-03-27/the-best-way-to-save-banking-is-to-kill-it.html<br /><br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13018267845508251802014-03-04T11:44:17.293-06:002014-03-04T11:44:17.293-06:00Ralph,
"You’re right. If government wades in...Ralph,<br /><br />"You’re right. If government wades into the market and tries to borrow, banks would need more equity. But my answer to that is that’s not vastly different to what happens anyway."<br /><br />Yes, it is significantly different to what happens anyway. The shareholders of banks can say no. You seem to be forgetting that increased share issuance dilutes existing shares. The existing voting shareholders can say no to new issuance if they so choose no matter the interest rate. Forget about crowding out, I am talking about auction failures.<br /><br /><br /><br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-66380422353975597462014-03-04T02:20:43.452-06:002014-03-04T02:20:43.452-06:00Frank,
You’re right. If government wades into the...Frank,<br /><br />You’re right. If government wades into the market and tries to borrow, banks would need more equity. But my answer to that is that’s not vastly different to what happens anyway.<br /><br />That is, if government borrows more under existing arrangements, that will raise interest rates all else equal, which means that depositors leave their money in their accounts longer and/or some private sector entities borrow less. The latter is of course popularly known as “crowding out”. <br /><br />Under the existing system and under the system I advocated above, if govt wants to negate the crowding out effect it can implement standard stimulatory measures, monetary or fiscal.<br /><br />A possible criticism of the new system is that interest rate rises would be steeper for a given increase in borrowing (either by govt or the private sector). My answer to that is that interest rates at the moment are artificially low because of bank subsidies (TBTF etc). Under the new system, bank subsidies are not needed, ergo the rate of interest is the genuine free market rate, or at least nearer the latter rate. <br /><br />And it’s widely accepted in economics that GDP is maximised where prices are at market prices, unless someone can point to a clear case of market failure.<br /><br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86277091282028883382014-03-03T17:58:19.526-06:002014-03-03T17:58:19.526-06:00Ralph,
As another example,
http://www.treasurydi...Ralph,<br /><br />As another example,<br /><br />http://www.treasurydirect.gov/instit/annceresult/press/preanre/2013/R_20131218_1.pdf<br /><br />Primary Dealer - Tendered = $64,789,600,000, Accepted = $21,814,297,500<br />Direct Bidder - Tendered = $10,760,000,000, Accepted = $4,125,552,500<br />Indirect Bidder - Tendered = $9,029,268,000, Accepted = $9,029,268,000<br />Total Competitive - Tendered = $84,578,868,000, Accepted = $34,969,118,000<br /><br />Without participation by the primary dealer banks, this bond auction would have failed (less than $20 billion in non-bank offers on over $30 billion in issuance).<br /><br />And so, federal government tells primary dealer banks they must issue equity to fund lending operations, primary dealer bank shareholders vote no and pull their government bond bids, and federal government goes haywire / Constitutional crisis.<br /><br /> FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-65935648413812030372014-03-03T17:28:45.485-06:002014-03-03T17:28:45.485-06:00Ralph,
Look at auction results instead of ownersh...Ralph,<br /><br />Look at auction results instead of ownership. <br /><br />http://www.treasurydirect.gov/instit/annceresult/press/press_auctionresults.htm<br /><br />For instance the latest 13 week / 26 week auction results:<br /><br />26 Week<br />Primary Dealer - $15,737,750,000<br />Direct Bidder - $2,873,250,000<br />Indirect Bidder - $5,701,988,000<br />Total Competitive - $24,312,988,000<br /><br />13 Week<br />Primary Dealer - $14,049,140,000<br />Direct Bidder - $1,268,080,000<br />Indirect Bidder - $9,074,677,000<br />Total Competitive - $24,391,897,000<br /><br />The primary dealers are banks. To secure the money to buy government bonds (lend to the federal government), banks such as the primary dealers must issue equity - yes?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-24362816566573778542014-03-03T10:53:59.558-06:002014-03-03T10:53:59.558-06:00Frank,
Whence your claim that banks have to issue...Frank,<br /><br />Whence your claim that banks have to issue more equity when government wants to borrow more? When government borrows and spends $X, what happens is, first govt borrows from all and sundry, not just private banks. It borrows from the Chinese, insurance firms, some wealthy individuals, etc. etc. Second, govt then spends the money back into the private sector, and third, govt gives bonds worth $X to those it has borrowed from. The main net effect is that the non-govt sector is up to the tune of $X worth of bonds.<br /><br />According to the source below, only 2% of US govt debt is held by banks:<br /><br />http://www.creditwritedowns.com/2011/09/holders-of-sovereign-debt.html<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-55331262295580267732014-03-03T08:24:11.525-06:002014-03-03T08:24:11.525-06:00Ralph,
That is all well and good until the federa...Ralph,<br /><br />That is all well and good until the federal government approves some stupid tax or spending policy and decides to fund the difference with debt.<br /><br />Federal government tells shareholders of bank they must issue more equity so that they can lend money to federal government, bank share holders tell federal government to piss off and a Constitutional crisis ensues.<br /><br />If you resolve this by saying - "just have the federal government print money", then why have a banking system at all? Lose your wallet - just have the federal government print the money you lost and give it to you. Lose your job - just have the federal government print your lost income and give it to you.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-31825091909127466312014-03-03T06:11:28.016-06:002014-03-03T06:11:28.016-06:00There is one beautifully simple rule that would di...There is one beautifully simple rule that would dispose of most of the problems that the banking sector throws at us. It was set out by John Cochrane here:<br /><br />http://www.hoover.org/news/daily-report/150171<br /><br />Essentially the rule is that an entity to lends money or invests in another entity must be funded by shares, not by debt, deposits or any other liability the value of which is fixed in dollar terms. Milton Friedman advocated the same idea in his book "A Program for Monetary Stability" a long time ago.<br /><br />That would largely dispose of the TBTF subsidy, sudden bank collapses, credit crunches, etc. Now surely the benefits exceed the costs there?<br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-26637493824345727872014-03-02T22:28:46.320-06:002014-03-02T22:28:46.320-06:00Let me pontificate as well:
I am sure that US pro...Let me pontificate as well:<br /><br />I am sure that US prosperity lies with scientists, engineers, entrepreneurs, venture capitalists, and business operators, a national work ethic and transparent government---what we need from the financial system is reasonably good intermediation and stability. <br /><br />Even a not-perfect but rock-solid financial system is good enough, as way more important is what is happening in R&D, the work ethic, what the venture capitalists are doing and so forth.<br /><br />So, we should err on the side of very simple, easy-to-grasp regulations or incentives that create a rock-solid financial system. <br /><br />Any whiff of complexity should be refused. Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-2651983860674848992014-03-02T22:04:01.566-06:002014-03-02T22:04:01.566-06:00I agree with John Cochrane!
Keep It Simple Stupid...I agree with John Cochrane!<br /><br />Keep It Simple Stupid (KISS) is essential reasoning in all things government (maybe even life, but set that aside). KISS is not only good operationally speaking, it is good in terms of transparency--it is not democracy if no one can understand what is going on. <br /><br />Our tax code is not democratic, nor the ACA nor the system of VA benefits. <br /><br />So simple deal: "You are a bank, and you want FDIC insurance, then put up X percent amount of capital (equity) on your loan portfolio. Equity dies first if your portfolio goes sour.<br /><br />I do see some risks in the "non-banks", let's call those financial institutions that do not want FDIC insurance. Systemic risks? If Cochrane says the non-banks should also have a very simple capital requirement, than I go along with Cochrane. <br /><br />KISS.<br /><br /><br /><br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-21117314622502236142014-02-28T10:03:53.804-06:002014-02-28T10:03:53.804-06:00I hate reading Latex text. It looks like it was wr...I hate reading Latex text. It looks like it was written on Plymouth Plantation back in the 1600s.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-11637643140190858842014-02-28T01:24:28.231-06:002014-02-28T01:24:28.231-06:00"A public choice economist might conclude tha..."A public choice economist might conclude that the purpose of regulation is simply to enhance regulator’s power to extract political and financial support from the regulated in return for subsidies and protection from competition. It would be hard to refute that view in the data."<br /><br />I think that sums it up!<br /><br />Excellent essay/analysis!<br />Neal Reynoldsnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-73952235807594269812014-02-27T18:37:55.819-06:002014-02-27T18:37:55.819-06:00Thanks. Yes, I like the ACA... as an example of dy...Thanks. Yes, I like the ACA... as an example of dysfunctional policy designed by economists. Not as a health insurance regulation! John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37162035714646344342014-02-27T18:26:39.946-06:002014-02-27T18:26:39.946-06:00You wrote: "I like the ACA, but its sympathiz...You wrote: "I like the ACA, but its sympathizers can surely find alternative examples just as disastrous in their minds."<br /><br />Unless I've completely misunderstood your writing on health care, I think you meant to say "I don't like the ACA…"Evan Jenkinshttp://ejenk.com/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-74208968088847771592014-02-27T16:50:25.506-06:002014-02-27T16:50:25.506-06:00What I really want is seamless latex to html... What I really want is seamless latex to html... John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-34115944517481628502014-02-27T14:25:16.254-06:002014-02-27T14:25:16.254-06:00Agree with Anonymous.
If you don't like the d...Agree with Anonymous.<br /><br />If you don't like the default computer modern font that LaTeX uses, you can \usepackage{times}, and other fonts are available as well. Word just sucks at typesetting.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-28969052357266863282014-02-27T13:46:08.166-06:002014-02-27T13:46:08.166-06:00No I didn't think a quarter trillion dollar lo...No I didn't think a quarter trillion dollar loss was fictitious. But even a quarter trillion on what was over $3.5 trillion in assets is what the equity markets would call a correction, not a run or a crash. Net change on total assets was about negative 7.1%.<br /><br />https://usequities.nyx.com/markets/nyse-equities/circuit-breakers<br /><br />Up until 2013, the circuit breakers in the equity markets were not triggered until the equity markets fell by 10% or more.<br /><br />It's more semantic than anything else. What distinguishes a crash from a run from a correction from everyday business?<br /><br />My only point was that in the big picture, the 2008 "run in money markets" if you prefer to call it that was small in scale compared to what happened to money markets through 2009 and 2010.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39054861151874712802014-02-27T12:41:05.940-06:002014-02-27T12:41:05.940-06:00It looks terrible! Compare any permutation of a Wo...It looks terrible! Compare any permutation of a Word document to a similarly formatted LaTeX document and judge which looks more enjoyable to read. Word docs literally hurt my eyes. I'll admit it's no greater than a third-order concern, but when I get the chance to read something by you that isn't technical and can therefore read while enjoying my Sunday morning, I strongly prefer LaTeX. <br /><br />Side note: I thought this ceased to be an issue for important academic papers, then Stephen Ross came out with The Recovery Theorem ...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-31375615004493711132014-02-27T11:02:41.479-06:002014-02-27T11:02:41.479-06:00More quarterly data? Did you think the quarter tr...More quarterly data? Did you think the quarter trillion dollar net loss was fictitious? Again, use *more* resolution, not more of the same. See figures 1 or 2 here (at end of doc) covering Lehman *week*.<br />http://tinyurl.com/m94h2ly<br />Then see this<br />http://www.youtube.com/watch?v=UJD7FSLC-lA#start=0:44;end=0:50<br />Falstaffhttps://www.blogger.com/profile/06865552505521389155noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-73166105738224393132014-02-26T22:30:30.307-06:002014-02-26T22:30:30.307-06:00What's so awful about word pdf?What's so awful about word pdf?John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-22657078167151719562014-02-26T21:51:03.915-06:002014-02-26T21:51:03.915-06:00http://www.research.stlouisfed.org/fred2/graph/fre...http://www.research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=MMMFFAQ027S,FEDFUNDS&transformation=pc1,lin&scale=Left,Left&range=Custom,Custom&cosd=2000-01-01,2000-01-01&coed=2013-07-01,2013-07-01&line_color=%230000ff,%23ff0000&link_values=,&mark_type=NONE,NONE&mw=4,4&line_style=Solid,Solid&lw=1,1&vintage_date=2014-02-26,2014-02-26&revision_date=2014-02-26,2014-02-26&mma=0,0&nd=,&ost=,&oet=,&fml=a,a&fq=Quarterly,Monthly&fam=avg,avg&fgst=lin,lin<br /><br />Sure looks like Money Market funds experienced net inflows all through 2008. The annual growth rate of flows into money markets peaked at 40% at the beginning of 2008. Net selling from money markets didn't begin until mid 2009. I included the fed funds rate along with growth in money market funds.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-71250665951315627612014-02-26T20:41:54.344-06:002014-02-26T20:41:54.344-06:00Of course there was a run on MMFs, collectively. ...Of course there was a run on MMFs, collectively. Look again with some more resolution. The point is that $247B walked out of all MMFs in *10 days* starting Sept 9, after which Treasury stepped in with a guarantee. Falstaffhttps://www.blogger.com/profile/06865552505521389155noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-9126226180240609292014-02-26T19:00:45.426-06:002014-02-26T19:00:45.426-06:00That better be the last time you link to a non-LaT...That better be the last time you link to a non-LaTeX .pdf, John.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-18510667007553076882014-02-26T17:37:37.448-06:002014-02-26T17:37:37.448-06:00"Regulations should only be enacted if their ..."Regulations should only be enacted if their benefits exceed their costs. Who can object to that?"<br /><br />Someone who realizes that costs don't affect the federal government like they do a private individual / enterprise. Define the benefits you want to incur, require effort for obtaining those benefits (no free lunches), and screw the cost. The non-discounted value of all future tax revenue (from which all costs are paid) is infinite - so why exactly does cost matter?<br /><br />I think the words you are looking for here are "unintended consequences" and "you can't please everyone all of the time". FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.com