Gordon Brown's Financial Shock and Awe
November 10, 2009
There are two broad views on our newly resurgent global bubbles--the increase in asset prices in emerging markets, fuelled by capital inflows, with all the associated bells and whistles (including dollar depreciation). These run-ups in stock market values and real estate prices are either benign or the beginnings of a major new malignancy. The benign view, implicit in Secretary Geithner’s position at the G20 meeting last weekend, is most clearly articulated by Frederic (Ric) Mishkin, former member of the Fed’s Board of Governors and author of "The Next Great Globalization: How Disadvantaged N
Should We Care About the "Big" in "Too Big To Fail"?
November 10, 2009
Oftentimes when you debate a skeptic of structural reform on Wall Street, the skeptic will say something like: "Why are you so worked up about 'too big to fail'? Lehman was far from the biggest bank on Wall Street, but it caused plenty of damage." If anything, "too-interconnected-to-fail" is the real issue, they'll say--implying that this makes addressing the problem utterly futile, since severing interconnections is a lot harder than limiting bank size. In my experience, this can temporarily wrong-foot you long enough for the other person to seize the rhetorical advantage.
Today in "Too Big To Fail": More Shrinkage Momentum
November 10, 2009
Very interesting development on the "too big to fail" front today: The Journal reports that Colorado Rep. Ed Perlmutter is planning an amendment to the systemic risk bill currently before the House Financial Services committee. The amendment would partly revive certain New Deal-era restrictions on banks: Rep. Ed Perlmutter (D., Colo.) is working on a separate amendment that would allow bank regulators to impose restrictions prohibiting certain companies from operating both a commercial bank and an investment bank if capital reserves fall below a certain level.
Could the Economy Survive With Just Medium-Sized Banks?
November 03, 2009
Josef Ackermann, chief executive of Deutsche Bank and chairman of the Institute of International Finance (an influential group, reflecting the interests of global finance in Washington) is opposed to breaking up big banks. According to the FT, he said, “The idea that we could run modern, sophisticated, prosperous economies with a population of mid-sized savings banks is totally misguided.” This is clever rhetoric--aiming to portray proponents of reform as populists with no notion of how a modern economy operates. But the problem is that some leading voices for breaking up banks come from peop
‘He Hasn’t Lost Anything Yet’
November 02, 2009
It was Halloween 2001, and Kennesaw State freshman Nick Ayers was sitting anxiously in an Atlanta airplane hangar. A friend had recommended him for a campaign position with Republican state senator Sonny Perdue, who was mounting a long-shot gubernatorial run against Democratic incumbent Roy Barnes. The portly, middle-aged politician disembarked his Bellanca Super Viking and, as Ayers recounts the story, walked down the stairs holding a lid-less cup of coffee. Eager to make a good first impression, the nervous blonde teenager extended his hand for a firm shake.
'Too Big' Banks Won't Disappear On Their Own
October 29, 2009
That's the conclusion of a new St. Louis Fed study by David Wheelock and Paul Wilson. In the two decades between the mid-80's and 00's, the number of commercial banks fell by 50% while the average size per institution surged by an inflation-adjusted 500%.
The Stock Market v. Treasury Yield Paradox, Resolved
October 29, 2009
The big market paradox of the past few months has been the differing signals coming out of the stock and U.S. Treasury markets. Stock prices have been roaring since early March, up over 50%. That should be a strong signal that economic conditions are on the upswing. But even though today's GDP report does show that the recession may have ended in the second quarter, Treasury yields have remained flat since the spring -- showing that there are some big doubts about the strength of a recovery. But Paul McCulley at Pimco says that this isn't really any sort of paradox at all.
Can We Fix Too Big to Fail Without Shrinkage?
October 28, 2009
David Wessel has a column in today’s Wall Street Journal laying out three approaches to solving our Too Big Too Fail (TBTF) problem. The first two amount to different ways of “busting them up,” as Wessel puts it.
Dan Tarullo, Regulatory Hero
October 27, 2009
Yesterday's Wall Street Journal had a pretty encouraging profile of Dan Tarullo, the Obama-appointed Fed governor. Take, for instance, this passage: Inside the Fed, where Mr. Tarullo succeeded a Bush-appointed free-market economist in the banking oversight post, the transition hasn't been seamless. Some Fed officials said privately Mr. Tarullo can have an overbearing skepticism of banks and supervisors. Some Fed staffers are so wary of being second-guessed they ask him to approve even mundane bank applications. Sounds pretty good to me.
Can Limits on Executive Pay Solve the Too Big To Fail Problem?
October 23, 2009
On Wednesday, Dan Tarullo, a governor of the Federal Reserve and distinguished law school professor, dismissed breaking up big banks as “more a provocative idea than a proposal” and instead put almost all his eggs in the “creation by Congress of a special resolution procedure for systemically important financial firms.” He stressed: “We are hopeful that Congress will, in its legislative response to the crisis, include a resolution mechanism and an extension of regulation to all systemically important financial institutions” (full speech). This put him strikingly at odds with Mervyn King, gove