circuit — The Federal Reserve Bored

Paul Krugman points out possibly the biggest challenge to sensible, rational policy making and debating these days:

The Times has an interesting headline here: Richard Fisher, Often Wrong but Seldom Boring, Leaves the Fed. Because entertainment value is what we want from central bankers, right? I mean, Janet Yellen is such a drag — she just keeps being right about the economy, and that gets old really fast, you know?

It really is too bad that it's these 'entertainers' -- they range from the likes of Rick Santelli and Larry Kudlow to the establishment types like Fisher -- get such media attention.

The Kardashians of economics and finance. They increase ratings.

On a happier note:

Anyway, in other news, I've had very little to blog these last few months but intend to get back into it in earnest fairly shortly so stay tuned.

Fictional Reserve Barking
The Federal Reserve Bored

circuit

Also

By far the most extraordinary and astonishing thing about ex-Dallas Federal Reserve Bank President Richard Fisher: in spite of being wrong ex post for eight straight years in a row on pretty much everything to do with the appropriate direction of and the risks to Federal Reserve policy, he not only never changed his mind, he never lost his dead-certain iron confidence that he was right....

Maybe if he stayed long enough, he'd be vindicated one of these times. Then he could declare victory. I guess he quit too soon to find out.

WCEG — The Equitablog
Evening Must-Read: Binyamin Applebaum: Richard Fisher, Often Wrong but Seldom Boring, Leaves the Fed
Brad DeLong

Guest Post — Ralph Musgrave: Dodd-Frank is useless, but try this…..

Dodd-Frank is useless, but try this…..

Ralph Musgrave

On the subject of Dodd-Frank, Richard Fisher, president of the Dallas Fed said, “We contend that Dodd–Frank has not done enough to corral TBTF banks and that, on balance, the act has made things worse, not better.” He’s right. So how do we dispose of bank subsidies?

Well it’s easy. In fact the way to do it is set out in three hundred words below (in contrast to the thousands of pages of Dodd-Frank and Basel III which fail to solve the problem). And, the system set out below has an additional bonus: it makes SUDDEN bank failures impossible.

Obviously any poorly run firm should be allowed to ultimately fail, but it’s the SUDDEN failures or RUNS ON banks that are the big problem. Anyway, the solution is as follows.

Bank creditors (depositors in particular) have to choose between two types of account. First there are checking or transaction accounts. Money in those accounts is NOT LOANED ON or invested. It’s lodged in a 100% safe fashion (e.g. at the central bank). And that means no interest for those depositors.

Second, depositors can put some of their money into accounts where the relevant money IS LOANED ON or invested.  Those “investment accounts” pay interest because the relevant money is being used. Moreover, depositors choose what’s done with their money. For example they could go for safety: e.g. have their money put into mortgages where the mortgagor had a minimum equity stake of say 20%. Or they could choose something more risky.

Next, the VALUE OF the stakes that depositors have in safe mortgages (or whatever they’ve chosen) varies with the value of the underlying assets (e.g. the mortgages). In essence, depositors buy into a mutual fund. Indeed Laurence Kotlikoff, one of the several people advocating this system, explicitly advocates mutual funds in this connection.
The net result is that there is no reason for any bank subsidy. The taxpayer WOULD STAND BEHIND transaction accounts, but since no risk is taken with the money deposited, there is minimal taxpayer exposure.

As to investment accounts or mutual funds, if a particular fund makes silly loans or investments, then all that happens is the value of stakes in the fund falls, just as it does at present when a mutual fund makes silly decisions. Those with stakes in the fund have little reason to run, in the same way as there wasn’t a catastrophic run on BP shares after the recent Gulf oil spill. And even if there is a run on a hundred mutual funds, that doesn’t have systemically disastrous results. As Mervyn King put it, “a sharp fall in equity values” does not “cause the same damage as a banking crisis”.

As to the impossibility of sudden bank failure under this system, George Selgin explained the reason very neatly. He said, “For a balance sheet without debt liabilities, insolvency is ruled out.”.

And that’s it. The solution in just over 300 words. And if you want to see the same solution set out by someone else, try this Bloomberg article by Matthew Klein, or this WSJ article by John Cochrane.

— Ralph Musgrave

Fed's Fisher and TBTF. The one thing he understands.

Federal Reserve Bank of Dallas President Richard Fisher extended his long-running effort to break up the biggest banks Wednesday at a time when the idea is gaining currency with policymakers on both sides of the aisle. Long a critic of letting financial firms grow "too big to fail," Mr. Fisher detailed in a prepared speech Wednesday an approach he said would prevent banking firms from growing so large and complex that their failure could undermine the entire financial system. The Dallas Fed chief spoke to the Committee for the Republic at the National Press Club.

Fed's Fisher: Limit Government Aid to Traditional Bank Unit
Kristina Peterson and Victoria McGrane
(h/t Ryan Harris in the comments)