I guess Janet Yellen got totally spooked a couple of weeks ago. Remember that House bill designed to limit the Fed's lending powers? The Fed Oversight Modernization and Reform Act? Yellen went nuts, saying it would completely politicize the Fed and cause it to be ineffective in crises.
So what does she do? The Fed is now adopting a set of new rules designed to limit its own power to lend. LIMIT ITS OWN POWER TO LEND!!!
From now on, it can only lend if at least five institutions need help. And it lends at a penalty rate, always.
This is nothing less than imposing discipline on the liability side of the balance sheet, which is ridiculous. The whole structure of banking is based on public subsidy of the liability side. (Deposit insurance.) Why put a timebomb there? To destroy taxpayer equity? What about effectively regulating what the banks are doing on the asset side? Hmm? Did that ever occur to them? For chrissakes the banks are into everything BUT plain, ordinary lending. They're trading CDO's and credit default swaps and commodity futures and currencies and all kinds of crap.
WTF is wrong wtih these people? Sorry to all the ladies reading this, but Janet Yellen--a woman--should not be Fed Chair. Wishy washy. Always looking for consensus. Not wanting to rock the boat. (Contrast with an Alpha Male like Volker, who, maybe I didn't agree 100% with his policies, but no one pushed the guy around.)
And Yellen is a snapshot of what a female presidency will look like so get ready.
The whole system is a joke. From idiots at the Fed to the morons in Congress to the neocon lunatics infesting the Obama Administration and DOD.
You might as well laugh. We're all doomed.
I really don't get this obsession with liability side restrictions.
ReplyDeleteIt has to be something to do with the obsession with 'market-based' solutions - even though the banks have demonstrated via their crappy lending decisions that approach leads to armageddon.
Add to that lending for financial settlement (particularly FX settlement) is probably a really silly idea. (Creating more of your money and introducing it into the FX market will do what to supply and demand?), and you find that you really do need to tell banks what they can and can't create money for. (Probably by simply making a loan for any unauthorised purpose unenforceable).
As a friend mentioned to me, these people haven't just got the wrong answers to the questions, they've got the wrong questions.
Mike this supports the view that they dont EVER want to be put in a position to have to run "negative equity"...
ReplyDeleteThis puts a cap on their financial commitment and turns it right over to Congress for an appropriation once their cap is reached (which I'm sure will be WELL beyond the point of any risk of having to report 'negative equity'....)
Perhaps score one for representative government here as these unqualified (alleged) 'technocrats' have surrendered their authority... but to your point throwing it right over to representatives who are just as stupid is no material help either...
In all democracies the central bank needs merging with the debt management arm of the Treasury. That way they can 'manage' the yield curve without any of these stupid stock lending fictions.
ReplyDeleteMike, no need to apologize for speaking the truth.
ReplyDeleteIs disciplining the liability side just twisted classic conservative thinking?
ReplyDeleteIts classic libertarian thinking...
ReplyDeleteIf the bank blows up they say "well you should have done a better job picking the bank you put your munnie in, its a free country after all!"
Like we all have nothing better to do than examining a potential banks asset side quality. ...
I would love to see the huge banks fail. Any negative effect on the economy could be easily rectified via massive fiscal stimulus.
ReplyDeleteRight, Matt Franko. Yellen is soooo scared of what Congress might do. Greenspan befuddled them. Bernanke schooled them. Volker smacked them. Yellen "mothers" them.
ReplyDeleteTyler,
ReplyDeleteThey would change their own fucking rule to save a big bank. Just watch.
“And it lends at a penalty rate, always.” Yes: we’ve been hearing that ever since Walter Bagehot advocated “penalty rates” in the 1850s. But when a crisis comes, politicians nearly always prefer to quickly paper over the cracks rather than see a large bank fail.
ReplyDeleteThe Fed loaned about $13trillion at the height of the recent crisis. I’ve tried to find out the average rate charged, can’t find anything. Certainly some of that money was loaned at a zero or near zero rate, and maybe all of it was. Anyone know the answer to that one?
Mike says “What about effectively regulating what the banks are doing on the asset side?” My answer is: how on Earth do you regulate loans to businesses? Judging which businesses are going to prosper and which are going to fail is extremely difficult. Do we force banks to fill in a hundred page form every time they make a loan to a business?
ReplyDeleteRegulating mortgages is easier. But even there, if some bank wants to grant NINJA mortgages, why not let it, as long as the bank is funded just by shareholders & similar rather than depositors? And if a bank wants to specialise in risky Silicon Valley start ups, why not – as long as taxpayers aren’t on the hook for megabux when that fails?
So I suggest regulate the liability side of lenders / banks. That is, have money lenders funded just like any other corporation: fund them via shares, bonds and similar – i.e. via any sort of stake where the saver / investor knows they may lose money, rather than fund them via deposits. That way taxpayers DON’T lose money.
That’s full reserve banking – supported by Milton Friedman.
"My answer is: how on Earth do you regulate loans to businesses?"
ReplyDeleteSimple. You proscribe a list of valid purposes for a loan. Anything outside that list becomes unenforceable in court.
That leaves the courts to decide what fits and what doesn't fit the list. If they decide it doesn't fit, then it becomes a gift of shareholders funds.
Operate like that and I guarantee you that banks will become very keen on their due diligence - because the client just has to argue in court that the loan was 'ultra vires' to get a freebie.
So actually it's really easy to regulate the asset side.