Comments on: "No more easy cash: banks must take their losses"

By: Anonymous

Anonymous — Sat, 22 Dec 2007 03:30:00 +0000

“It is currently far too cheap for banks to sit on cash, so the central banks must make it clear that, once the end-of-the-year settlements are passed, they will let the interbank market rates rise and rise, as high as needed to provide banks with the incentive to relinquish the vast amounts of liquidity amassed over the past few months. In short, they should call the banks’ bluff.”

If this is the professor speaking, he has it quite backwards. Higher administered rates would only create more fear of credit risk amongst banks, discourage them away from even higher libor spreads, and encourage them to take even greater refuge in marginally higher treasury bills.

By: a

Sat, 22 Dec 2007 03:00:00 +0000

“not lending to bad credit risks is redlining”

Is it? I thought it was using geographical zones to determine bad credit risks (rather than income, character, …).

By: foesskewered

foesskewered — Sat, 22 Dec 2007 02:31:00 +0000

Sorry, not a fan of ayn rand, her novels are almost unreadable. Of course, I thought Finnegans wake was unreadable too, for different reasons. The overwhelming, oppressive , heavy stances she pushes are almost a reminder of what the worst ideologues of the 20th century were.

Sure, the article almosts misses the topic of reform but before reform can even be contemplated, the problems have to be solved, not temporarily but by biting the bullet.

The suffering caused by the crisis of the moment will impact not just the culture of consumerism but more importantly perhaps, highlight the income gap and that's where the nascent impetus for socialism will reside.

By: dearieme

dearieme — Fri, 21 Dec 2007 22:13:00 +0000

I request that when you mention Leading American Economists, you remind me which is which. Thus for one you might write “[too odious even for Harvard]“, for another “[stole from Russia]” and for a third “[worked for Enron]“. I’d find that helpful.

By: Mencius Moldbug

Mencius Moldbug — Fri, 21 Dec 2007 21:44:00 +0000

Oh, and have you ever noticed that not lending to bad credit risks is redlining, whereas lending to bad credit risks is predatory lending? Does the phrase Community Reinvestment Act mean anything to you? Dr. Krugman, like all great political intellectuals, takes his cut coming and going.

By: Mencius Moldbug

Mencius Moldbug — Fri, 21 Dec 2007 21:37:00 +0000

The problem is not regulation but complexity.

No one, however crazy, denies that fractional-reserve banking depends on regulation. Bagehot described the regulator's task in Lombard Street: distinguishing between liquidity and insolvency.

In other words, a classic Bagehotian lender of last resort needs to be able to distinguish administratively between good loans and bad loans.

We've seen how well the ratings agencies do at this. Do you really think that if you set Paul Krugman up with his own brand new Federal department, perhaps the Department of Debt, he would do a better job?

He probably would. For a while. Then his ratings would degenerate into little pieces of meaningless bureaucratic model-generated red tape, like everyone else's ratings.

This is the regulatory cycle. Complexity creates loopholes, loopholes create bubbles, bubbles create crashes, crashes create calls for new regulation, new regulation creates more complexity. Lather, rinse, repeat. How many more times do we need to go through this?

The fundamental problem is that fractional-reserve banking depends on administrative pricing of securities, and administrative pricing doesn't work.

Um, you are aware that The Jungle was a novel, n'est ce pas? I sure hope the bloggers of 2106 won't have to resort to State of Fear when they try to explain what went into those cans labeled "IPCC." Oh, wait, I forgot, Upton Sinclair good, Michael Crichton bad.

By: CrocodileChuck

CrocodileChuck — Fri, 21 Dec 2007 19:28:00 +0000

Blue Skies

the Reserve Bank of New Zealand under Don Brass actually floated the idea of dissolving itself-leaving depositors to 'vote with their feet' vis a vis healthy banks and where they put their money. Also, neither in NZ or here in Australia do we have FDIC deposit insurance.

Of course, we have spared ourselves the mayhem and carnage of the fragmentation of credit formation you have in the USA (mortgage repossessions here remain as the lowest on Earth)

CrocodileChuck

Crocodile Chuck

By: blueskies

blueskies — Fri, 21 Dec 2007 18:05:00 +0000

“It has become an article of faith that less regulation is better, despite mounting evidence to the contrary.”
The problem isn’t the ideal amount of regulation, IMHO it is mixing capitalism and socialism. Although they are each self consistent, a mixture of both is not. Mixing capitalism and socialism is like mixing coffee and beer. The end result doesn’t keep the best qualities of both, it is crap. Since financial institutions have a mix of explicit and implied govt guarantees, deregulation in their case amounts to a half capitalist half socialist system. For example, take Californias electic utility “deregulation”. Supporters of capitalism and socialism compromised and agreed to half of each (retail prices fixed by the govt, but market based wholesale prices with the kicker that long term contracts were not allowed, had to buy short term essentially spot prices). It failed spectacularly. Deregulation of a capitalist enterprise makes sense. But not a socialist system. Should we “deregulate” the FDIC?

By: Anonymous

Anonymous — Fri, 21 Dec 2007 17:39:00 +0000

Banks will continue to find new ways to transfer risk and thus add new layers of risk to the market; that is what they do best.

New methods and mechanisms will be engineered, arm-in-arm (no pun intended) alongside FASB accounting charades which enable bridges to be constructed which allow financial manipulation and non-accountability to jump from one offshore island to the next, all in the name of GAAP and SEC reporting (fraud).

The latest scams are already in the pipeline:

LDI strategies are starting to gaintraction in the United States. This interest is a response to increased volatilityin financial reporting and cash contribution requirements 4 caused by the Pension ProtectionAct of 2006 (the PPA) and financial accounting reform of how plan sponsors account forpension plans under new Financial Accounting Statement 158 (FAS 158). Included amongt he effects of the PPA and FAS 158 are faster funding requirements...

By: James

James — Fri, 21 Dec 2007 17:35:00 +0000

That seems to be the prevailing wisdom. Admit loses rasise capital and continue flooding the world with bad debt, but as Japan as shown this much much easier said then done and this is a global problem not a country specific one. I am very discouraged that this financial crisis is much larger and global in scope than any previous ones and market participants seem to even more confident that everything is just going to perfect in a couple of months. The is survivorship bias at work.