Senator David Vitter submitted one of my questions to Federal Reserve Chairman Ben Bernanke, as part of his reconfirmation hearings, and received the following reply in writing (as already published in the WSJ online): Q. Simon Johnson, Massachusetts Institute of Technology and blogger: Andrew Haldane, head of financial stability at the Bank of England, argues that the relationship between the banking system and the government (in the U.K.
The fundamental divide in opinion regarding our financial system is: Are the people running "large integrated financial groups" hapless fools, buffeted by forces beyond their comprehension and control; or do they know exactly how to ensure they get the upside and the awful, sickening downside is borne by society--including through high unemployment? Some light was shed on this issue by Monday’s meeting at the White House or, more specifically, by who didn’t turn up and why.
The guiding myth underpinning the reconstruction of our dangerous banking system is: Financial innovation as we know it is valuable and must be preserved. Anyone opposed to this approach is a populist, with or without a pitchfork.Single-handedly, Paul Volcker has exploded this myth. Responding to a Wall Street insiders' Future of Finance “report,“ he was quoted in the WSJ yesterday as saying: “Wake up gentlemen. I can only say that your response is inadequate.”Volcker has three main points, with which we whole-heartedly agree:(1) “[Financial engineering] moves around the rents in the financial system, but not only this, as it seems to have vastly increased them.”(2) “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy.”and most important:(3) “I am probably going to win in the end.”
Increasingly, leading bankers repeat versions of the argument made recently by E. Gerald Corrigan in his Dolan Lecture at Fairfield University. Corrigan, former President of the New York Fed and a senior executive at Goldman Sachs for more than a decade, makes three main points. (1) “Large Integrated Financial Groups”--at or around their current size--offer unique functions that cannot otherwise be provided.
In some influential circles, these questions are now asked: What’s wrong with high levels of inequality in general, and with having very rich bankers in particular? After all, human societies have survived the presence of extremely wealthy individuals in the past--in fact, some now argue, the presence of such a “new aristocracy” can finance growth and spur innovation. This argument is deeply flawed along three dimensions. (1) Such super-elites care very little for anyone other than themselves. Certainly, there will be some charity--but remember that John D.
Just when momentum was starting to build for increased capital requirements as the core element of an approach that will reign in reckless risk-taking, Morgan Stanley effectively demolishes the idea. In “Banking – Large & Midcap Banks: Bid for Growth Caps Capital Ask,” (no public link available) Betsy Graseck, Ken Zorbo, Justin Kwon, and John Dunn of Morgan Stanley Research North America dissect the coming demands for more bank capital. “In short, we think the demand for growth and access to credit will trump desire for unprofitable capital levels… For the large cap and midcap banks, we
In my post yesterday about derivatives, I mentioned the importance of "clearing," which would help sever the interconnections between firms on either side of a derivatives trade. (The interconnections are what can put the whole financial system at risk when one firm, like Lehman, runs into trouble.) But one of the problems with clearing is that it requires clearinghouses, which are privately-owned entities that end up with a lot of power to influence the way derivatives get regulated.
“Banking on the State” by Andrew Haldane and Piergiorgio Alessandri is making waves in official circles. Haldane, Executive Director for Financial Stability at the Bank of England, is widely regarded as both a technical expert and as someone who can communicate his points effectively to policymakers. He is obviously closely in line--although not in complete agreement--with the thinking of Mervyn King, governor of the Bank of England. Haldane and Alessandri offer a tough, perhaps bleak assessment.
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
For all of the crazy arguments against health care reform, a few of them are entirely sensible--and worth taking seriously. As I write in my latest Kaiser Health News column, which appeared on TNR’s home page yesterday, one of those is the worry that Congress won’t follow through with promises to raise the revenue--or find the savings--necessary to finance expansions of health insurance. In other words, Congress may pass a law calling for reductions in Medicare expenditures or raising an assortment of new taxes.