Is History on Paul Volcker's Side?
December 15, 2009

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, Pau

"Large Integrated Financial Groups": Can't Live Without 'Em?
December 08, 2009

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.

Feudal Lords of Finance
December 01, 2009

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.

Will Increased Capital Requirements Kill a Recovery? Morgan Stanley Wants You to Think So.
November 25, 2009

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

Why Banks Shouldn't Control Clearinghouses
November 25, 2009

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.

America's Economic "Doom Loop"
November 17, 2009

“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.

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

Is Cost Control a Joke?
November 06, 2009

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.

Another Step Closer to Breaking Up the Banks?
November 05, 2009

A banking industry lobbyist I spoke with this evening alerts me to a fascinating development in the House Financial Services Committee: Pennsylvania Rep. Paul Kanjorski is about to introduce an amendment to the systemic risk bill moving through the committee (see my discussion here and here) that would give regulators the power to break up too-big-to-fail firms. The details are a little unclear--as it stands, the current bill would give the Fed some vague powers in this vein. But the soon-to-be Kanjorski amendment appears to go much further, and the banks are freaking out about it.

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