I made a post a while ago about the revolving doors here at the banks in
Another “president” was heralded for her “great” tenure at a local bank here in
The stories go on and on.
However, this brings up a very important point if we are ever to improve our financial system and stop another such debacle from happening again. The regulators have to go after the people who did this, not the banks.
I don’t know of one bank in
The consequences can reliably be predicted to be, of course, shitty.
Since we’re not targeting the problem (the people who caused this), but rather the entities or shells they used to cause this economic crisis (the banks), the problem will continue and there will be no genuine justice.
I asked an insider in the regulatory world who shall remain nameless if they authorities were going after the people or the banks and s/he said, unfortunately they’re going after the banks, not the people.
Grand. The OTS, the NCUA, the OCC and the FDIC are not targeting the cancerous scumbags who are corrupting the system, but the vehicles or legal entities they infect. It seems banks will be forever in perpetuity, shitty.
12 comments:
Capt'n, what else would you expect in a country that goes after guns in the pursuit of crime prevention, rather then the people that use those guns in criminal pursuits?
The destructive power of private sector greed, hubris, fanaticism and groupthink is equalled only by public sector incompetence, ignorance, laziness and apathy.
"Here was a royal fellowship of death." - Henry V
Something strange here. In any business, the employees make or break you. If a bank chooses to hire idiots, then another bank that chooses to hire better folks will do better. Why is it any business of the regulators? Same thing with car companies really. So the question becomes who's running these things and how come they don't have the normal consequences of being fired with bad references.
The laws of nature would dictate that someone benefits from having all the idiots on the payroll.
You should distinguish between targeting the cause and bringing the responsible people to justice. The regulators, that is the government, does the first thing wrong and the second objective is not pursued at all, with the exception of a shitty piece of 90%-tax-legislation against the members of one specific bank.
How does this persist? The usual suspects:
Principle/Agent problem: the managers have better information than the stockholders or owners
Moral Hazard: unobserved actions
Adverse selection: unobserved quality
Peter Principle: rising to your level of incompetence
Cowardice: the unwillingness, inability or ineffectiveness of leadership to correct bad behavior and provide honest evaluations.
Pass the Trash: give a good review to get rid of people you don't want (and avoid embarrassing and costly conflicts)
Lawyers: there's what you know and what you can prove in court to 12 people too stupid or unimportant to get off jury duty.
Bribery, patronage, and rent seeking: politicians gain much by dividing the spoils with the criminals.
I agree with all of you, but you're shouting at the wind.
"However, this brings up a very important point if we are ever to improve our financial system and stop another such debacle from happening again. The regulators have to go after the people who did this, not the banks."
Captain, the solution isn't regulators, and you should be ashamed of yourself for assuming that it must be so.
Stop bailing their asses out and banks that insist on continually hiring idiots will go out of business. It's that simple. Nothing like having a ton of of the existing banks failing to create an environment where a competent startup bank can grab market share.
Ryan, don't substitute a delusional libertarian view of reality for a delusional leftist view of reality. While free markets are far more efficient and functional than command economies and a better starting point, there really is such a thing as market failures. I already named several of them.
There might be a free-market approach to regulation and insurance of banking which could work, but it must be mandated and overseen by government. The industry won't or can't police itself. There cannot be banking without regulation and examination. There is too much at stake to risk greed and incompetence wrecking the system.
Deregulation wasn't the problem with this crisis. The problem was regulators not doing their jobs. And they didn't do their jobs because the government WE elected applied political pressure on them, putting social objectives (i.e. affordable housing) ahead of the safety and soundness of the banking system. Anyone who suggests "affordable housing" programs should henceforth be lynched at the nearest lamp post.
Very, very few banks were "bailed out". Taking over a bank, firing its management, selling the assets, and leaving stockholders with NOTHING is NOT a "bail out." WaMu, Wachovia, and IndyMac were not bail outs. We bailed-out only the largest banks and they are paying a heavy price for it. The only problem now is how we wrench the equity from government hands.
Banking has enormous economies of scale, so large banks are more efficient. But that also exposes us to tremendous risk: "too big to fail". This creates moral hazard, a form of market failure. That's why we had to bail out the large banks, otherwise we risked the collapse of our entire monetary system and another Great Depression.
What you call "startup banks" are actually called "de novos". De novos often lose money in their first three years and are on shaky ground from 3-8 years. They don't have the capital to buy failed bank assets, and under the plan you had of a 100% Required Reserve Ratio, they NEVER would. You might as well suggest we go back to gold coins or even barter eggs for haircuts.
Many de novos DO get deposits from other failed banks, but competition for those deposits is fierce. De novos are also almost always community banks. If a bank fails in Las Vegas, a de novo in Memphis isn't going to get the deposits. Deposits do not instantaneously and uniformly diffuse through the banking system. Large banks often get most of the deposits of failed banks.
I have a lot of sympathy for your libertarian and Austrian views. I'm a big fan of Hayek, von Mises, Rothbard, et al. But what you DON'T know about the banking system could fill volumes.
"While free markets are far more efficient and functional than command economies and a better starting point, there really is such a thing as market failures. I already named several of them."
Note that I didn't contradict anything you said. I take it for granted that stupid decisions will be made by damn near everybody and have never claimed otherwise. Markets have the advantage of weeding out the stupid to minimize their impact.
"There might be a free-market approach to regulation and insurance of banking which could work, but it must be mandated and overseen by government."
I'm going to disagree with you here. Allowing banks to engineer runs on each other whenever they overleverage themselves would prevent banks from overleveraging themselves for long.
"Deregulation wasn't the problem with this crisis. The problem was regulators not doing their jobs. And they didn't do their jobs because the government WE elected applied political pressure on them, putting social objectives (i.e. affordable housing) ahead of the safety and soundness of the banking system. Anyone who suggests "affordable housing" programs should henceforth be lynched at the nearest lamp post."
Your claim here seems to imply that regulators saw the crisis coming but decided not to do anything about it. I don't give them that much credit. I think they didn't see it coming, although I agree that political pressure pretty much guarantees that they wouldn't have done anything even if they understood what was going on.
"Taking over a bank, firing its management, selling the assets, and leaving stockholders with NOTHING is NOT a "bail out.""
Where'd all those billions of dollars go? As for firing the management and selling the assets, the Captain has already pointed out the revolving door of the banking industry. They're playing musical chairs with management positions and bank assets, but how much is actually leaving the system? The whole point of the bailouts is to keep banks from losing assets.
"Banking has enormous economies of scale, so large banks are more efficient. But that also exposes us to tremendous risk: "too big to fail". This creates moral hazard, a form of market failure."
Moral hazard isn't just exclusive to markets. It applies to governments just as well. In the case of private companies ignoring risk on the expectation of being bailed out, the moral hazard is created by the government.
"That's why we had to bail out the large banks, otherwise we risked the collapse of our entire monetary system and another Great Depression."
Without the expectations of bailouts (and the precedent set by the Long Term Capital Management bailout in 1998) I would argue that banks would be more cautious and not require so much help in the first place, but I don't think your theory of chronic recklessness is all that far off the mark. Rather, I think the expectation of a bailout adds fuel to a fire that could probably sustain itself anyway.
"They don't have the capital to buy failed bank assets"
You pointed out that the market for failed bank assets is extremely competitive. With more banks failing, those assets would be in greater supply. Lower prices follow, which allows other banks to obtain them more easily. Markets clear.
"... under the plan you had of a 100% Required Reserve Ratio, they NEVER would."
I never had any such plan. Someone else mentioned it without understand it and I played devil's advocate to explain how a system would operate. Fractional reserve requirements need regulators to enforce them, and how often do I argue we need more of those?
The basic idea was that you make money by offering services and then reinvest your profits, rather than fabricate money from nothing to make more black ink than red. But hey, you didn't seem to understand last time and apparently missed the point that I don't even believe in 100% reserve requirements. I was just explaining it to fill the gap in understanding a position that probably deserves a little more attention than it gets, although in the end I disagree with it.
"But what you DON'T know about the banking system could fill volumes."
Obviously. I'd say that anyone who thinks their knowledge is within a few volumes of everything there is to know about nearly anything as broad as "banking" is greatly overestimating their understanding.
Given the relative ignorance of nearly any individual involved in any industry anywhere, I'll take my chances letting people fail or succeed on their own, rather than trust some regulator to have both a greater understanding of an industry and its participants and the balls to do something about it when everyone else thinks all is well.
Anyone smart enough to know when the market is headed for trouble is smart enough to make a fortune on their greater understanding, not acting as a regulator. Anyone stubborn enough to intervene in a market where most people are acting too recklessly is also stubborn enough to interfere even when he's wrong to do so and most people know it.
Obviously the market isn't perfect and sometimes it's just downright stupid, but I doubt regulators will ever do a better job than people when you leave them alone, no matter how stupid the market participants are. The more regulation is needed, the greater the political pressure to not intervene.
Ryan, I do not deny the Captain's point about the revolving door of bad bankers. The same could be said about many professions. That problem arises because, as the Captain stated, problems come to light AFTER someone has moved on.
Unfortunately, being stupid or incompetent is not a crime. Even wild risk taking can't get your license revoked. It takes outright fraud, and for that there must be provable evidence. The Captain faulted regulators, but I don't think he wants to abolish regulators as you do.
Allowing banks to engineer runs on each other whenever they overleverage themselves would prevent banks from overleveraging themselves for long.
More ignorance. How exactly does a bank "engineer" a run on another bank? A run is when depositors withdraw their money in a panic. Are we going to see commercials from ABC Bank saying, "XYZ Bank is loaned up, so your deposits there are unsafe."? First of all, that's illegal. Second, ABC would get sued by XYZ. You're not talking about market discipline. You're talking about emotional and informational chaos.
"Leverage", as you call it, isn't the hazard. A bank can be totally loaned up and have plenty of liquidity. We currently have a 10% RRR on transaction deposits and 0% on time deposits and most banks do just fine with that. Banks can always go to the discount window or borrow reserves from other banks for short-term liquidity problems. Runs can destroy the liquidity of even healthy banks.
Banks need to hold excess reserves only in uncertain times, such as now and that is part of the problem - bank lending standards are so tight, it's strangling the economy. That's what the capital injections (i.e. the bailouts) were all about.
There are plenty of examples of markets NOT weeding out the stupid. They're called Market Failures. I gave a long list: Principle/Agent, Moral Hazard, Adverse Selection, Rent Seeking, Asymmetric Information... do you require the complete list?
I do not dispute that government often gets it more wrong than failed markets. That has a name too: "Government failure".
The regulators most certainly saw what was happening and some complained bitterly about it. But distinguishing between a boom and a bubble is a perennial problem in economics. It is not a regulator's job to throw a wet blanket on the fire just because activity is frenetic. High ratios of loans to capital aren't a problem if those loans are performing. Good lending standards and diversifiable risks are the safety valves.
It takes the recognition of systemic risk to trigger a regulator to apply the brakes. That is a hard thing to see, and often it comes too late. Congress and the last two presidents were pushing "affordable housing." No regulator was going to take that punchbowl away as homeownership rates climbed. That was our collective national problem of a warped view of the "American Dream", not the fault of regulators. Regulators operate under rules, and those rules are determined by politicians.
I agree with you that bailouts beget bailouts. I simply pointed out that you painted all the policy and regulatory action taken with the broad brush of "bail out" when very few banks got bailed out. The bail out money was significant, but a very small percentage of banks got it and the bank owners paid a high price for it: share dilution.
"Squaaaaawk, Markets Clear, Markets Clear (whistle)"
When banks fail, the deposits and assets are spread around, but they are not diffused uniformly. The BIG banks get most of it. I gave you a geographical example, and you ignored it. Markets clear, but there are clearly winners and losers. De novos don't win much. Asset concentration is increasing among the larger banks.
For a "Devils Advocate" you certainly keep explaining and defending the position of a 100% RRR quite often. By definition, if we don't have a "fractional reserve" system, we have a 100% RRR. That system does not function because, as I explained, a bank couldn't keep its lights on with only non-interest income from service fees.
I listened to the former Chairman of the SEC speak last week. He came up with a whole list of regulatory reforms. I thought to myself, "Yeah, I agree with you but that will never happen in our political system."
I'm saying the same thing to you. I firmly believe in free market solutions everywhere and anywhere they can be applied, but you have to understand the shortcomings of the market to prevent disaster.
Arthur Anderson was supposed to be an unbiased, incorruptible, external auditor for Enron. Maintaining its reputation with due diligence was just plain good business sense. AA's managers and stockholders had a lot to lose by compromising their integrity. Look how that turned out!
"More ignorance. How exactly does a bank "engineer" a run on another bank?"
More ignorance indeed, but this time it's entirely on your part. Historically, banks would from time to time try to ruin their competition by collecting notes issued by the competing bank and calling them in all at once. When word got out that a bank was in trouble or that withdrawals were not available, it would trigger a run. This happened a lot when banks issuing their own notes was more common, which for the most part fell out of vogue in the 19th century although there are a few banks (such as the Royal Bank of Scotland) that still do it.
Don't worry that you didn't know about that, it was probably in one of the volumes of information that you didn't know about banking.
Under a modern fiat system, where convertability isn't an issue, a bank could trigger a run by casting a competitor's solvency into doubt by building up deposits at the bank for a while and then withdrawing them, combined with an advertising/propaganda campaign. People don't have absolute faith in banks even under the current system, and if banks were allowed to shove each other if they got too close to the edge, they'd all have to play it that much safer.
"First of all, that's illegal. Second, ABC would get sued by XYZ. You're not talking about market discipline. You're talking about emotional and informational chaos."
You're defending a system of laws that enable banks to take part in risky behavior with no fear of consequences until the entire system implodes at once or gets saved by a few hundred billion dollars on the taxpayer's dime. I'd rather have the chaos that comes with occasional bank failures than the catastrophe of total system collapse or the moral hazard of the government backing up the banking industry no matter what.
""Leverage", as you call it, isn't the hazard. A bank can be totally loaned up and have plenty of liquidity. We currently have a 10% RRR on transaction deposits and 0% on time deposits and most banks do just fine with that."
It's a house of cards. If you borrowed $100 each from ten friends on the expectation that you could pay them back when they asked but you only kept $100 on hand, you'd be an idiot.
"Banks can always go to the discount window or borrow reserves from other banks for short-term liquidity problems. Runs can destroy the liquidity of even healthy banks."
We have different ideas of what constitutes a "healthy" bank. You think having a buck in your pocket when you owe ten is healthy. I think it's stupid and dangerous.
"Banks need to hold excess reserves only in uncertain times, such as now and that is part of the problem - bank lending standards are so tight, it's strangling the economy. That's what the capital injections (i.e. the bailouts) were all about."
Capital injections is a misleading term in a way; correct in the finance sense (where it just means money), incorrect in the economics sense (where we're talking about liquidity). The government was just dumping liquidity, not higher order goods, and it'd be easy for some people to get confused.
Anyway, throwing money at banks isn't going to make them start lending more. They're just as likely to start paying bonuses, buy golden parachutes, or build up their own liquidity reserves to try to avoid their own insolvency.
"There are plenty of examples of markets NOT weeding out the stupid. They're called Market Failures. I gave a long list: Principle/Agent, Moral Hazard, Adverse Selection, Rent Seeking, Asymmetric Information... do you require the complete list?"
None of those are instances of market participants being stupid. They're reasons why a person acting in their own interest might have adverse consequences on others.
Stupid people tend to lose money. Institutions that hire stupid people lose money because of them. The economic strength of those institutions tends to increase when they hire competent people, and tends to decrease when they hire idiots. It's not an instantaneous process, but the pressure is there.
"It takes the recognition of systemic risk to trigger a regulator to apply the brakes. That is a hard thing to see, and often it comes too late. Congress and the last two presidents were pushing "affordable housing." No regulator was going to take that punchbowl away as homeownership rates climbed. That was our collective national problem of a warped view of the "American Dream", not the fault of regulators."
So that makes regulators the answer? Yeah, that makes sense. Keep in mind that the biggest regulator of all, the Federal Reserve, absolutely had the power to raise interest rates, which would lead to a tightening of lending requirements and presumably less subprime loans and backing of garbage plans for condo development.
"Regulators operate under rules, and those rules are determined by politicians."
Makes me wonder why anyone has any faith in them ever.
"I agree with you that bailouts beget bailouts. I simply pointed out that you painted all the policy and regulatory action taken with the broad brush of "bail out" when very few banks got bailed out. The bail out money was significant, but a very small percentage of banks got it and the bank owners paid a high price for it: share dilution."
If a cloud of community banks run into trouble, but the majority of bad loans were covered by the bailout, how does that prove your point? Besides, with the government talking about buying toxic assets as a matter of course, that'll give money even to stupid community banks too small to afford their own lobbyists.
""Squaaaaawk, Markets Clear, Markets Clear (whistle)""
Fuck you? Markets clear. I don't care if they clear uniformly or not, and suggesting that anything for sale will be sold in equal proportions to all buyers is stupid anyway.
"When banks fail, the deposits and assets are spread around, but they are not diffused uniformly. The BIG banks get most of it. I gave you a geographical example, and you ignored it. Markets clear, but there are clearly winners and losers. De novos don't win much. Asset concentration is increasing among the larger banks."
I ignored it because it's irrelevant. A competent larger bank can take assets from failing competition. So? It doesn't matter where it goes; what matters is that bank failures transfer wealth from incompetent institutions to those who manage themselves better, which is why allowing failing banks to fail is good policy in the long run. It encourages better management, discourages irrational risk taking and prevents the moral hazard that arises from banks knowing they are "too big to fail".
"For a "Devils Advocate" you certainly keep explaining and defending the position of a 100% RRR quite often."
Until you understand it. I expect I'll have to explain it dozens of times from here.
"By definition, if we don't have a "fractional reserve" system, we have a 100% RRR."
No, we could have a system where there is no reserve requirement at all. Let banks issue their own notes, let them cannibalize each other if they start getting reckless, and stop protecting them from each other or the other forces that would take bad banks down.
"That system does not function because, as I explained, a bank couldn't keep its lights on with only non-interest income from service fees."
Now you're being stupid. You can collect interest on deposits. You can back initial deposits with venture capital. I explained all this already.
"Arthur Anderson was supposed to be an unbiased, incorruptible, external auditor for Enron. Maintaining its reputation with due diligence was just plain good business sense. AA's managers and stockholders had a lot to lose by compromising their integrity. Look how that turned out!"
Arthur Anderson was later absolved of any wrongdoing, but they had already been torn apart by regulators at that point. Then, when one of the other accounting firms was found to actually be doing something wrong, they couldn't be taken down because that would lead to too much market share for the remaining companies. Hoooray, regulators!
@Ryan:
Historically, banks would from time to time try to ruin their competition by collecting notes issued by the competing bank and calling them in all at once.
You had to go back more than a century and across the ocean to find an example of banks able to "engineer" runs on one another. The game and the rules here and now are quite different from then and there.
Most bank assets cannot be "called in" - they have fixed exercise dates and firm contract terms. Contract law and financial instruments have matured a lot in the 150 years since this was common practice.
One of the bigger threats to banks today are brokered deposits. Such noncore funding is highly unstable and detrimental to a bank's CAMELS rating and therefore to its insurance assessment. Regulators and only regulators monitor and get banks to cease and desist from such practices.
It would serve little purpose for a bank to use its liquid assets to make deposits at other banks. The interest rate spread means they'll make more money off loans than in some other bank's deposits.
Don't worry that you didn't know about that, it was probably in one of the volumes of information that you didn't know about banking.
Of course I knew about that. When I'm discussing the development of successful counterinsurgency tactics for Iraq and Afghanistan, I don't examine the effective employment of Greek hoplites in the open field against the Persian Army.
Learning lessons from history also requires learning how and when it's appropriate to apply them.
A bank could trigger a run by casting a competitor's solvency into doubt by building up deposits at the bank for a while and then withdrawing them, combined with an advertising/propaganda campaign.
Wow, we got rid of one competitor. Only 300 left to go! Oh, but then there's that inconvenient "against the law" and "getting sued" thing in the way again.
You're defending a system of laws that enable banks to take part in risky behavior with no fear of consequences until the entire system implodes
Getting out of bed in the morning has risks. Staying in bed has risks. Risk taking is a key component of capitalist economic growth. Profit is the reward of risky entrepreneurship. Monopoly rents are the reward for risky research and development. Why are you cowering in fear over a system which has developed successfully as an engine for economic growth?
You're defending a system which died out from its own inefficiency when Abraham Lincoln was president.
I'd rather have the chaos that comes with occasional bank failures than the catastrophe of total system collapse
Uh, chaos and total collapse of the banking system is precisely why we developed the Federal Reserve system and bank regulation in the first place.
We didn't get this crisis from inherent flaws in regulation or a "house of cards" banking system. It came from bad lending practices encouraged by US government policy to promote home ownership - policies which shielded banks from the risk of their own actions - actions they wouldn't have taken in the absence of said government policy.
If you borrowed $100 each from ten friends on the expectation that you could pay them back when they asked but you only kept $100 on hand, you'd be an idiot.
And you'd be a bigger idiot to use an analogy of lending money to ten friends to describe banks with tens of thousands of depositors with hundreds of millions of dollars (who do not demand all their money on the same day) and access to funds from other banks and the Federal Reserve for temporary liquidity problems.
We have different ideas of what constitutes a "healthy" bank. You think having a buck in your pocket when you owe ten is healthy. I think it's stupid and dangerous.
I have a piece of paper on my wall that says "Doctor of Philosophy in Economics" on it - a piece of paper with absolutely no value. For 25 more years I will be paying tens of thousands of dollars for debt it took to get that worthless piece of paper. My decision to attain that piece of paper for all that money was neither dangerous nor stupid. My employer carelessly pays me thousands of dollars each month because of that "worthless" piece of paper on the wall. Both my employer and I remain entirely unconcerned about living in a "house of cards" built on worthless paper.
I remain entirely unconcerned that a bank holding less than 10% of the funds deposited therein constitutes a risky business practice when they have the means to borrow funds to cover short-term inability to meet depositor demands. I'm more worried about being attacked by Ninjas.
Capital injections is a misleading term in a way; correct in the finance sense (where it just means money), incorrect in the economics sense (where we're talking about liquidity). The government was just dumping liquidity
You haven't got the faintest idea what "capital" and "liquidity" mean in the context of modern banking.
Capital regulates the capacity of a bank to lend. Tier 1 capital consists mostly of shareholder equity. Banks with sufficient capital vs. their risk-weighted assets are considered "healthy." Liquidity is a bank's ability to meet its short-term obligations. The need for liquidity derives from the fundamental aspect of banking where they borrow short (deposits) and lend long (e.g. mortgages).
Unless you wish to end mortgage lending, you can't wish away the liquidity dilemma.
Anyway, throwing money at banks isn't going to make them start lending more.
Smartest thing you've said so far, but you don't understand why. It has little to do with bonuses.
None of those [market failures] are instances of market participants being stupid. They're reasons why a person acting in their own interest might have adverse consequences on others.
No, they are instances where even smart people in a perfectly free market are unwilling or unable to achieve an efficient allocation of resources.
Stupid people tend to lose money.
Lots of stupid people make extraordinary sums of money. It happens every day. Hollywood is full of them. This is more naive idealism. My wife is in wealth management and she works with wealthy, brain-dead clients every day. The clients' saving grace is that they realize they're too stupid to manage their own money, so they pay someone else to do it.
The economic strength of those institutions tends to increase when they hire competent people, and tends to decrease when they hire idiots.
Where ever this corner of heaven is, let me know and I'll join you there. In the real world, all business is sales and you're confusing competent functioning as a banker with competent salesmanship. The Captain's whole book is replete with examples of reality colliding with your idealism. I'm not saying I like it. I'm saying there is no way to overcome this sad and sorry situation without the watchful eye of a regulator who has no financial stake in the organization's profits.
Keep in mind that the biggest regulator of all, the Federal Reserve, absolutely had the power to raise interest rates
The Fed is wearing two hats, and it's one hat too many. When the Fed engages in monetary policy (if you believe in the efficacy of such a thing) through open market operations, it's focused on macroeconomic responses, not the whiles and wherefores of a particular loan (or vintage of loans). The purpose of lowering interest rates was to increase aggregate demand. The unintended side-effect was a 'search for yield' by investors flush with cash. This coincided with a housing bubble already underway. The Fed did not cause this housing bubble, and if you'd read the Captain's book he explains it very well in there.
All bank regulation should be consolidated under one regulator outside of the Fed, preferably the FDIC. Since they manage the insurance fund for deposits, they have a vested interest in ensuring good banking practices.
If a cloud of community banks run into trouble, but the majority of bad loans were covered by the bailout, how does that prove your point? Besides, with the government talking about buying toxic assets as a matter of course, that'll give money even to stupid community banks too small to afford their own lobbyists.
The "bailout" hasn't covered any loans yet. TARP hasn't TARPed yet. Buying the toxic assets is what they should have done in the first place at a large discount from par. Over 90% of mortgages are still performing. These "toxic" assets might be quite lucrative, especially with the overly generous guarantees Geithner is giving. It's the uncertainty which has people scared.
Fuck you? Markets clear.
No, markets do not always clear. It's called market failure. The whole point of the capital injections is that lending has seized up. There's a big gap between borrowers and lenders. The market has been cleared - it's completely empty! Mutually beneficial gains from trade are not being made because of fear and uncertainty.
It's apparent you've finished Econ 101. It's time to take Econ 201. When you get to Econ 401, you'll be almost ready to start having meaningful discussions with me.
I don't care if they clear uniformly or not,
It matters crucially if, as you say, you want "start up" banks to thrive off the rotting corpses of failed banks. Bank failures usually increase market concentration which leads to other forms of market failure - market power, oligopoly, monopoly. Bank failures do not usually result in a healthier and happier small community banks.
A competent larger bank can take assets from failing competition. So? It doesn't matter where it goes; what matters is that bank failures transfer wealth from incompetent institutions to those who manage themselves better...It encourages better management, discourages irrational risk taking and prevents the moral hazard that arises from banks knowing they are "too big to fail".
You specifically said "start up" banks would benefit from bank failures. Now you're saying it doesn't matter and it's ok for larger banks to scarf them up. Oh, but then you have that "too big to fail" problem.
Bank failures don't transfer wealth. They transfer assets and liabilities. The buyers of failed banks get assets at a discount, hoping the NPV of cash flows or interest income exceeds the purchase price. They are also usually subsidized by the FDIC with a cap on losses. So it takes government to close the deal.
Until you understand it. I expect I'll have to explain it dozens of times from here.
Repeating the same fallacious argument isn't an explanation.
So you're not, as I suspected, a "Devil's Advocate" but rather a full-fledged advocate of a scheme you probably read on a Ron Paul website.
No, we could have a system where there is no reserve requirement at all. Let banks issue their own notes, let them cannibalize each other if they start getting reckless, and stop protecting them from each other or the other forces that would take bad banks down.
Chaos!
No holds barred!
Cannibalize!
Scavenge failure!
Let's just abandon civil society and return to the rule of the jungle. Might makes right. It works in the African Savannah so it should work well for us too.
Shall we remove the M-16s from the Army and issue flintlock muskets? You're digressing to the banking system under Abraham Lincoln again. There is a reason we no longer operate this way. Several of them actually. They were called "panics" and "credit crunches" and "depressions."
Now you're being stupid. You can collect interest on deposits. You can back initial deposits with venture capital. I explained all this already.
Oh, so banks will collect fees for storing money rather than paying interest on deposits. Now you've digressed to the practices of 15th century Italian Jewish goldsmiths.
You cannot raise venture capital to back deposits because the pitiful fee income will not sufficiently compensate the venture capitalists for the opportunity cost of their funds!!!
You have explained nothing. You merely sent words through your cyber vocal chords and made noises.
Arthur Anderson was later absolved of any wrongdoing
Another example of your loose grasp on reality.
The US Supreme Court overturned the conviction of AA because of faulty jury instructions from the judge and because of a specious legal argument by the prosecution. By no means was AA "absolved" by SCOTUS. In fact, hundreds of civil suits against them for accounting fraud remain. The overturned conviction was the fault of the prosecution, not the regulator. You're conflating two separate functions of government. It seems you know even less about jurisprudence than you do about banking.
I suppose you think midnight shredding parties of Enron files under subpoena was just another competent accounting practice by a well-respected firm.
Look, I'm not asking you to abandon your love of free markets. Nor do I deny the inherent risks of fractional reserve banking. Nor do I support subsidization of bad business practices except in the narrowest and most precarious circumstances. I admire your "outside the box" thinking. But seriously, your prescription for banking is as fanciful a plan for capitalism as Das Kapital was for socialism. It is neither economically functional nor politically feasible to implement.
I've been down with laryngitis the for the past five days, so I'll keep this shorter than I would otherwise.
First, when I say what I think the law ought to be, it's stupid to remind me what the law is.
Second, regulators aren't the only people who have an interest in a bank maintaining some semblance of sanity or stability in their own practices. Shareholders presumably care too, and probably just a bit more.
Third, you attribute the Federal Reserve for preventing economic collapses and recessions, apparently completely oblivious to the biggest recession in US history happening not two decades after the Fed was founded. Pre-Federal Reserve recessions tended to be short and sharp. The Fed can claim there is less volatility on average, but whether that is desirable or not is debatable.
The Fed wasn't created to protect the banking system from collapse. It was created to try to micromanage the economy. Obviously that was hard to do when banks are issuing their own notes, as was common practice in the 19th century before federal fees were introduced to kill the practice.
"I remain entirely unconcerned that a bank holding less than 10% of the funds deposited therein constitutes a risky business practice when they have the means to borrow funds to cover short-term inability to meet depositor demands. I'm more worried about being attacked by Ninjas."
That's reasonable. Ninjas are responsible for more deaths than cancer, heart disease and Clint Eastwood put together. They just don't tell us about it.
"You haven't got the faintest idea what "capital" and "liquidity" mean in the context of modern banking."
I damn well do; I just explained it to you, as well as the difference between liquidity in the banking sense and the economic sense. Just to be sure, I double-checked before I made my post because I know how nitpicky you get when you're trying to prove you're smarter. Stop being so damn pedantic.
"Lots of stupid people make extraordinary sums of money. It happens every day. Hollywood is full of them. This is more naive idealism. My wife is in wealth management and she works with wealthy, brain-dead clients every day. The clients' saving grace is that they realize they're too stupid to manage their own money, so they pay someone else to do it."
Looks to me like stupid people turning their money over to smart people so they don't lose it. Thanks for proving my point.
"Where ever this corner of heaven is, let me know and I'll join you there."
Ok, so you're saying there's no correlation between competence and success? I made a very simple, very basic claim; that hiring competent people tends to increase the strength of the organization that hired them. Then you went off on some tangent about sales. Awesome.
"All bank regulation should be consolidated under one regulator outside of the Fed, preferably the FDIC. Since they manage the insurance fund for deposits, they have a vested interest in ensuring good banking practices."
Incentives work on individuals, not institutions. Only when the individuals in an institution have incentive pressures does it change the way the institution operates. An FDIC employee doesn't lose his paycheck if the FDIC has to cover for somebody's deposits. He has no more incentive to make sure a bank is in the clear than anyone else. Hell, even if the FDIC covered both responsibilities, it'd still be almost certainly be handled by different individuals and different departments, so even if everyone was trying to do their job there'd still be internal clashes.
"Mutually beneficial gains from trade are not being made because of fear and uncertainty."
If someone decides that the risks of an activity outweigh the rewards, it takes a lot of balls (or a disregard for subjective value) to tell them they're missing out on a "beneficial" arrangement. They sure don't seem to think so. What makes you so much better a judge of their best interest than they are?
"You specifically said "start up" banks would benefit from bank failures."
I specifically said competent startup banks would benefit from a ton of existing banks failing, yes. You seemed more interested in ignoring that I'm not just talking about one or two banks failing and that I'm talking about competent people taking better advantage of opportunities. I think you decided to ignore that in favor of lecturing on what "de novo" means.
"Bank failures don't transfer wealth. They transfer assets and liabilities."
Gotcha. So wealth doesn't include assets. Glad we're making sense here.
"So you're not, as I suspected, a "Devil's Advocate" but rather a full-fledged advocate of a scheme you probably read on a Ron Paul website."
I've explicitly stated several times that I think we ought to have a zero percent reserve requirement. Zero. As in, none. Zilch. Also zero as in "as far from 100% as you can possibly get." How is this so hard to understand? Is there any way I can make you take me at my word for what I believe? Do I need to draw a fucking picture or something? Seriously, what's it going to take, because your doubt here is just ridiculous.
"Let's just abandon civil society and return to the rule of the jungle. Might makes right. It works in the African Savannah so it should work well for us too."
You might want to double-check your definition of "civil society" before you say I want to abandon it. Here's a crash course: civil society is the voluntary civic and social organizations within society. It's not the government.
Calling for less government intervention isn't a move to abandon civil society. It's neutral in regards to civil society at the very least. It strengthens civil society if said social organizations were to pick up any of the functions that regulators previously served, for example if a church had an insurance program for members in the event of bank failure.
"You're digressing to the banking system under Abraham Lincoln again. There is a reason we no longer operate this way. Several of them actually. They were called "panics" and "credit crunches" and "depressions.""
Show me a recession in the 19th century as bad as the Great Depression in the 20th, and then we'll talk about which system fucks up hardest. Central banking wasn't adopted because independent banks didn't work, it was adopted because it allows for a concentration of power that's easier to tinker with on a political level. Banks issuing their own notes was killed off for the same reason.
"Oh, so banks will collect fees for storing money rather than paying interest on deposits. Now you've digressed to the practices of 15th century Italian Jewish goldsmiths."
Sorry, that was a mistype on my part. Banks would collect money on loans, not deposits. Their profits would be the interest they collect on loans. Hell, credit card companies don't do anything but make high interest loans at the drop of a hat (card, whatever) and they seem to make money just fine.
"You cannot raise venture capital to back deposits because the pitiful fee income will not sufficiently compensate the venture capitalists for the opportunity cost of their funds!!!"
When an organization can't make it without some special government treatment to turn it profitable, that tells me that that organization is a waste of resources. That's kind of how capitalism works; money-losing operations are a waste of resources. You think banks wouldn't exist and I think you're wrong, but even if you're right then all it tells me is that banking really is unprofitable without special government help. I have a hard time buying that.
"The US Supreme Court overturned the conviction of AA because of faulty jury instructions from the judge and because of a specious legal argument by the prosecution."
Ok then, presume they're guilty and call it good. That's a great way to reward prosecutorial screwups. But since AA is a different can of worms entirely, I'll concede that point.
AA was doomed before the regulators got them. A company in an industry based on reputation is dead as soon as the stock market get wind of suspicious practices. No regulators needed.
Hell, even if AA didn't implode after Enron, any company that would hire them after that might as well announce to the world, "We have something to hide."
"But seriously, your prescription for banking is as fanciful a plan for capitalism as Das Kapital was for socialism. It is neither economically functional nor politically feasible to implement."
I don't give two shits in an old sock whether it's politically feasible to implement or not. The coalition of special interest groups, corrupt favor-pushers and entitlement parasites that comprises US politics can die in a fire for all I care. Their preferences have zero bearing on what I think is right.
As for my prescription for the banking system, are you talking about the zero percent reserve system I've actually said I believe in, or the 100% reserve system you seem convinced I believe in?
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