Fixing the Banks
| Thu Oct. 22, 2009 3:15 PM PDT
Martin Wolf explains how he'd fix the banking system:
First, create a set of laws and institutions that make it possible to bankrupt any and all institutions, even in a crisis. Second, make financial institutions safer, with much higher capital requirements, against all activities. Third, prevent off-balance-sheet activities. Fourth, impose dynamic provisioning. Fifth, require huge cushions of contingent capital. Finally, cease to favour debt-finance, throughout the economy.
This is very sensible sounding: the first item is a backstop in case the others don't work, and four of the remaining five items are aimed at reducing leverage throughout the banking system. (Dynamic provisioning is the exception. It might be a good idea, but it's not directly related to reducing leverage.) Now extend this to the rest of the financial system and make sure to write the rules with no wiggle room, and you're done. Piece of cake, really. Any other problems you'd like solved?
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Comments
This list of wants is
Submitted by Anonymous (not verified) on Thu Oct. 22, 2009 5:23 PM PDT.
This list of wants is charmingly beyond what the most well-intentioned legislature and administration could ever accomplish.
Regulatory Capital
Submitted by The Lounsbury (not verified) on Fri Oct. 23, 2009 4:56 AM PDT.
Dynamic provisioning is a system for regulatory capital provisioning that seeks to be counter cyclical. Bank of Spain adopted such an approach.
Martin Wolf and you are all
Submitted by Anonymous (not verified) on Thu Oct. 22, 2009 5:54 PM PDT.
Martin Wolf and you are all fucked up.
How about just saying no to white collar crime. Each director of those companies along with the CFO and CEO and President and probably 1/2 the managers and a few of the senior staff all breached their fiduciary responsibilities to the owners of the corporation (shareholders) as well as to the state that gave them a corporate license.
Prosecute the fuckers and send them to PMITA prison. Put the videos on YouTube.
Problem solved.
Problem solved until the
Submitted by Art Eclectic on Thu Oct. 22, 2009 7:06 PM PDT.
Problem solved until the next batch rises up to take their place. That's the unfortunate thing about human beings, greed and self-interest are programmed right into the primary hardware. Centuries of cultural conditioning has taught most of us that by sticking together and cooperating, we all prosper. However, there's always that 10% sociopath sector that just doesn't give a damn. We have laws because of those people and we have regulations because of those people. When we started allowing the sociopaths to WRITE the laws and regulations, well that led to trouble.
Now, if you want to discuss a spay and neuter program for those who can't play well with others.....
I think that the one change
Submitted by JS (not verified) on Thu Oct. 22, 2009 7:19 PM PDT.
I think that the one change that would have the most beneficial impact is this one suggested by Goldman Sachs CEO Lloyd Blankfein a few weeks ago:
senior bankers should get most of their pay in deferred equity and top executives should be required to retain the bulk of the equity until they retire
Force the decision makers to keep their compensation in their firms' stock until they retire, rather than allowing them to take it out every year and keep it when their companies fail because of their actions. You will see then what their appetite for risk is.
Whats the point.
Submitted by Omega Centauri (not verified) on Thu Oct. 22, 2009 7:33 PM PDT.
We have a political system whose primary actors need to raise ungodly amounts of cash every election cycle just to keep their jobs. The financial industry (still) has tons of cash to corrupt the system. What wewill get is what the masters of the universe want, not what amateur -or even professional policy wonks think makes sense. The politcians will probably smear some lipstick on the pig just to make it look like they/we are in charge. But, when all is said and done, it will still be a pig wearing lipstick.
Seventh, pay regulators a lot more
Submitted by g. powell on Thu Oct. 22, 2009 7:53 PM PDT.
Wolf missed something, you can have great rules, but if financial regulators are paid the same as other civil servants, they will always be out foxed.
The govt will never match private sector salaries, but it could do better. Singapore has lectured the U.S. on this, at they're right.
Haven't you acknowledged
Submitted by MNPundit (not verified) on Thu Oct. 22, 2009 8:10 PM PDT.
Haven't you acknowledged yourself that the world economy is driven by the lower capital requirements? Wouldn't investment grind to a halt with "much" higher capital requirements? I'm not saying I have a problem with this but please square the circle. Are you saying less investment (a lot less I'm assuming) is appropriate?
I don't think I've ever said
Submitted by Kevin Drum on Thu Oct. 22, 2009 10:01 PM PDT.
I don't think I've ever said anything like that. Basically, higher capital requirements would force banks to carry less debt, and less debt is good.
(Now, I have said that I like the idea of capital requirements rising in good times and declining in bad times, and I still think that's a good idea if it's feasible to implement it. Maybe that's what you were thinking of?)
Probably what I am thinking
Submitted by MNPundit (not verified) on Fri Oct. 23, 2009 8:10 AM PDT.
Probably what I am thinking of.
I'm not accusing you of anything. I just got the impression that these higher capital requirements would be so much higher it would do damage. Thanks for responding.
Fixing the banks?!??
Submitted by Anonymous (not verified) on Thu Oct. 22, 2009 8:45 PM PDT.
For a moment of confusion, I started thinking of this in the context of what happens to pets at the vets.
Silly me. It's what the banks have already done to their 'regulators' and the Congress.
We already have laws that
Submitted by skeptonomist (not verified) on Fri Oct. 23, 2009 6:26 AM PDT.
We already have laws that make it mandatory to "bankrupt" banks. The rules were worked out in some detail by the New Deal and these laws have not been rescinded yet, though Congress passed some special legislation to allow Paulson, Bernanke, Geithner et al to override them.
Even the Constitution is being overridden currently in the war on terror, and if bankruptcy laws were part of the Constitution they would probably be ignored also.
Great Ideas
Submitted by Sebastian (not verified) on Fri Oct. 23, 2009 8:53 AM PDT.
First, get the Palestinians and the Israelis to stop fighting. Second, design a system that addresses the Palestinians' feelings of getting ripped off and abused for decades while also quelling Israelis' fears about half the world trying to wipe them off the planet. Third, implement said system without nearby actors sabatoging it.
Everyone knows what's good. Doing it with real people is the problem.
More seriously, I think our financial system kind of has the wrong aim. The whole government structure is about trying to keep failure in the financial system from happening. The problem is that we tighten down in one area, and failure pops up in an unexpected area. Or the regulators all catch the same collective maddness as the people regulated, and ignore the blind spots that kill us.
It would be much better to say: failure and recession are inevitable, lets work it out so things fail more gracefully and people don't get hurt as much.
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