Monday, September 29, 2014

Simon Johnson — Two Views of Finance

The first view is that “we have done a lot” since the global financial crisis erupted in 2008. According to this view, which is put forward on a regular basis by some US Treasury officials and their European counterparts, there may be a bit more to do in terms of implementing reforms, but our banks and other financial firms have already become much safer. The crisis of 2008 cannot soon be repeated.
The second view is that we are a long way from completing the far-reaching changes that we need. Even worse, on at least one key point, the very language used among policymakers and leading journalists to describe finance is badly broken.
The issues are complex and nuances abound, but much of what divides the two sides in this debate comes down to this: Is it acceptable to say that banks “hold” capital?
If you have been following MMT, you likely know that bank capital is equity rather than assets held in reserve against losses.

Project Syndicate
Two Views of Finance
Simon Johnson | former chief economist of the IMF, a professor at MIT Sloan, and a senior fellow at the Peterson Institute for International Economics


Ralph Musgrave said...

1. So some people according to Johnson claim “we have done a lot”. Hilarious. So what proportion of those are Wall Street bankster / criminals or politicians in the pay of the latter criminals? My guess is about 95%, but I’m happy to be proved wrong.

2. On the subject of capital, there is a simple reason for arguing that the ONLY liability of a lending entity / bank should be capital. It’s thus. There is no excuse for ANY SORT OF SUBSIDY for banks. Ergo all subsidies should be removed, including lender of last resort (which incidentally Walter Bagehot did not approve of). And if all subsidies are removed, then every bank creditor by definition becomes a shareholder of a short: that is, if the bank goes DISASTROUSLY wrong, then all bank creditors take a hair-cut or are wiped out.

Unknown said...

"which incidentally Walter Bagehot did not approve of"

Care to provide details/ a quote?

Unknown said...

"And if all subsidies are removed, then every bank creditor by definition becomes a shareholder of a short"

no, a creditor is not the same thing as a shareholder.

Anonymous said...

Bank capital is just the net difference between the bank's assets and its liabilities. "Equity" is in this context a synonym for "capital". However, since a bank's assets come in many different forms, and those assets are classified and weighted in various different ways for regulatory purposes, it makes sense to think of bank capital as also coming in different forms.

As y says, shareholders are not creditors, and the bank's liabilities do not include the ownership stake of the shareholders.

A bank's common shareholders are in first loss position. So it does indded make sense to think of the bank's capital as - among other things - a buffer against potential losses. If a bank has capital of $X dollars, then it can stand to lose $X dollars before it becomes insolvent.