seeking knowledge and laughter, putting a bullseye on inaccuracy

Financial Crisis and Reform

Is Timothy Geithner, head of the Treasury Department, leading a charge toward socialism, saving the banks, or setting up the next big crisis (or all three and more?)? I don't know. I feel very comfortable weighing on telecom issues, energy issues, and a variety of other policy matters that I have deeply studied. But all this financial stuff is really friggin complicated ... perhaps because the "Greed is Good" generation sent its best minds to Wall Street to make money rather than producing something of value (which can include banking services - but that wasn't what these folks were doing).

So I find it all very frustrating. I'm trying to read up on it - Michael Lewis' The Big Short is on my short list of books to read. As is Simon Johnson's 13 Bankers. What I did just read is Joshua Green's "Inside Man" and I don't quite know what to think of it. I generally find Joshua Green a pretty astute observer, so I wanted to write about it.

I agree entirely with this quote from Geithner:

“In a crisis, you have to choose,” Geithner told me. “Are you going to solve the problem, or are you going to teach people a lesson? They’re in direct conflict.”

Nothing that I have read suggests the bank bailouts could have been avoided absent a desire to create a much bigger crisis. But I am deeply disappointed in the Obama Administration's unwillingness to pass good policy into law to limit the size of banks and crack down on shady practices that serve to enrich a few bankers but do nothing to improve the overall efficiency of the economy.

[Simon] Johnson contends that Team Obama has ignored the necessary step of breaking up the power of what he calls the “oligarchies”—the big Wall Street banks—as part of the reform process, which is what happened after the emerging-market crises. “If your banks have run themselves into the ground doing crazy things,” he told me, “you need a substantial shift in the power structure. In the ’90s view, the Geithner-Summers view, it is essential that you address that problem as part of the immediate stabilization policies.” To Johnson, as ardent a believer in regulatory capture as George Stigler ever was, it’s plain that Geithner has fallen under Wall Street’s spell, and that through him and his whole apparat, Obama has too.

I do recommend this article as a decent start in understanding why Obama's Administration has done what it has done. But it seems that we really need Congress to push good policy. Obama doesn't seem up to the task.


Does size matter?

We need to get past the idea that bank size is necessarily bad. Lots of small banks get run into the ground. In Canada, one of the few countries that had no (0) bank failures in the past several years, there are 5 large banks. These five dominate the entire banking structure of Canada. 2 main differences: leverage in Canadian banks is about 18-1 (many of the US banks were leveraged more than 30-1. Derivatives: Canadian banks don't see much use in them.

Actually there is one reason that Canadian banks don't fail and US and European banks do. Regulation. Canadian banks are boring, the way American banks used to be before the repugnants and democrazies deregulated them. They are tightly regulated so that they only do -- I don't know -- BANKING THINGS!

Size Matters

Size may not have been the single reason the banks failed and needed a bailout, but size matters when it comes to whether banks are serving the community.