Thursday, January 28, 2010

Current thinking

Mervyn King reveals his guru: an obscure US economist with big ideas

Everyone needs a guru, even the Governor of the Bank of England. When Mervyn King mentioned him by name three times during evidence on the future of Britain’s banking sector, MPs were left scratching their heads over the identity of a little-known American economist who, it appears, has been bending the Governor’s ear. “Mervyn is an old buddy. I think he is the finest central banker in the history of the Bank of England. He has more courage than any other governor.

Posted by devo @ 12:18 AM (1581 views)
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17 thoughts on “Current thinking

  • The Harvard-educated economist wants to ban banks from lending money that is not matched in cash reserves.

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  • 1. devo

    Would that mean more bank bailouts or a further kick in the teeth for Main St? One of the same perhaps?

    Every now and then I get the feeling that I’m being played or is that paranoia, maybe It’s hate speech these days?

    It’s becoming confusing. Nice of you to line someone up for future blame Merv. Ever thought of a teaching job yourself?

    Theory is less harmful than practice.

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  • Simple and effective. Nice. Ha ha. How much regulation would be needed with that?

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  • Bring in the Austrians?

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  • Of course the killer question to Mervyn King is “What would you do differently next time round?” or even “If you could have a little word in your own ear in August 2006 at the (now infamous) 2006 Mansion House speech, what would you say?”

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  • It would be much less fiddly to nationalise the banks .At least that way you could have th huge leveraging pf Fractional reserve banking ( which the Gure dislikes ) but with all the profits going to the State to replace taxes on work and business.

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  • You don’t need to go to America for this advice. James Robertson has been arguing along these lines for years, and others. I wonder how long Kotlikoff has been arguing this? Could it be that now there is a crisis, ideas of radical economists are dusted off and presented by the mainstream as their own? I heard Kotlikoff speak a few years ago and he sounded nothing like a radical, completely predictable mainstreamer.

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  • mark wadsworth says:

    Re what Devo says, I have done a full response on my blog for future reference.

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  • OK Mark, which reforms are you in favour of apart from LVT?

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  • mark wadsworth says:

    Nick B, sorting out banks is dead easy, given the political will:

    1. No taxpayer bailouts. No implicit insurance. Sensible minimum capital ratios based on risk-weighted assets. Unsercured loans and loans on the land element of property or “private equity” count as high risk and are notionally written down by 50%.

    2. If losses wipe out shareholders’ funds, then bondholders get some of their debt converted to equity, worst case, bank gets split into two (like they have finally done with NR, two and a half years after the event). See also “contingent convertibles”, a sort of rolling debt-for-equity swap.

    3. Proper supervision (there are three tell tale signs – rapid expansion, very competitive rates, high degree of reliance on money market funding – all of this has been known for decades), if banks muck about, they get their deposit taking licence withdraw.

    4. Building societies should go back to being building societies – to be funded purely by deposits and to lend out at sensible loan to income and loan to value ratios.

    5. Merchant banks and investment banks that don’t take deposits can do what they like, hedge funds and “private equity” can do what they like, short selling is perfectly acceptable.

    6. Deposit taking banks are NOT allowed to lend money to or invest in other banks or securities issued by or back by other banks (they have this rule in Spain and I think Canada).

    7. Glass-Steagal is going too far, but it’s fair to say that depositors should not be liable for losses incurred in proprietary trading.

    There. Not difficult is it?

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  • happy mondays says:

    Mark Wadsworth for prime minister ! Yeaaahhh

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  • Will 1-7 ensure that banks don’t become too big to fail though? Far from obvious to me. What makes you think “proper supervision” is even possible? Re 1., I assume you wouldn’t in fact have let the banks fail in the current set up – as then we’d simply have no money (credit) supply. And why should the rest of society continue to support a parasitic rentier class that merely create loans with a stroke of the pen and charge interest on them?

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  • mark wadsworth says:

    HM, thanks.

    NickB, banks do not and cannot “fail” in the traditional sense of a business losing money year after year and its owners shutting it down. Banks are just middlemen – what happens is that shareholders lose some or all of their money and bondholders also lose some of theirs. But most of the borrowers continue repaying, the branch network and the employees and computers are still there.

    So what they have done now with NR is exactly what I said they should have done went it first happened (only I’d have missed out the middle bit with the taxpayer bailout, which to be fair was largely repaid). No depositor has lost money, no branches have been shut, relatively few employees have lost their jobs and so on. The supply of credit depends far more on there being creditworthy borrowers than it does on banks having cash.

    Proper supervision is dead easy, these things don’t happen overnight, they take years to build up – look at the Icelandic banks or NR which miraculously grew by 20% a year for four or five years. And if that’s too complicated, what do you think was driving house price rises of 15% a year? This has all happened time and time again.

    The problem is the political issue with Home-Owner-Ism – all the people who think that rising house prices mean that we are getting richer. If it were accepted that low and stable house prices are much better for us (and to the extent there is spare cash sloshing around, it should go into productive investment), then strict banking supervision would be incredibly popular, like everybody accepts that selling alcohol or tobacco to minors has to be prevented and restricted and regulated.

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  • I thought in the great depression in the US there was a whole domino wave of bank failures, and consequently too little money around…. since the banks that were no longer in business were not making loans. And did no depositors lose money?
    “Proper supervision is dead easy, these things don’t happen overnight, they take years to build up ” – I think there is a tension between the two parts of this statement. The point is, if you have the rentier class that makes a living by creating credit, not by producing anything real, there is always the temptation to “innovate” to soup this up further. It’s an innate tendency that you then have to build up elaborate structures to try to defeat the innovators / fraudsters. Where is it done successfully? (I think we had this conversation before).

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  • mark wadsworth says:

    Nick B, in America in the 1920s it was a share-price bubble rather than a house price bubble, but the basic model is the same.

    I didn’t word this sentence properly: “Proper supervision is dead easy, these things don’t happen overnight, they take years to build up “

    What I mean is “Proper supervision is dead easy. It takes years for banks (individually or collectively) to blow a really big credit/asset price bubble. Even if you miss it in the first year, you can still nip it in the bud in year two, and if you miss that, you can still do it in year three – anything is better than leaving it for five or six years and then watching it collapse”

    Banking supervision is not like a foreseeing and preventing a sudden outbreak of cholera or an invasion from outer space, you just keep chipping away at those f*ckers and put them in their place.

    Where was it done ‘successfully’? Canada did least-badly in the latest bloodletting, I think. The UK did very well until the 1970s (which coincided with a house price bubble, of course). Even after the late 1980s house price bubble popped, there were no real huge worries about the banking system. Barings and BCCI and Maxwell all went *pop* and nothing terrible happened.

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  • mark wadsworth says:

    Nick B, in America in the 1920s it was a share-price bubble rather than a house price bubble, but the basic model is the same.

    I didn’t word this sentence properly: “Proper supervision is dead easy, these things don’t happen overnight, they take years to build up “

    What I mean is “Proper supervision is dead easy. It takes years for banks (individually or collectively) to blow a really big credit/asset price bubble. Even if you miss it in the first year, you can still nip it in the bud in year two, and if you miss that, you can still do it in year three – anything is better than leaving it for five or six years and then watching it collapse”

    Banking supervision is not like a foreseeing and preventing a sudden outbreak of cholera or an invasion from outer space, you just keep chipping away at those f*ckers and put them in their place.

    Where was it done ‘successfully’? Canada did least-badly in the latest bloodletting, I think. The UK did very well until the 1970s (which coincided with a house price bubble, of course). Even after the late 1980s house price bubble popped, there were no real huge worries about the banking system. Barings and BCCI and Maxwell all went *pop* and nothing terrible happened.

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  • vacuouspolitician says:

    Mervyn King reveals his guru: an obscure US economist with big ideas

    What! Dangermouse was not American…how dare they!

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