Monday, 22 October 2012

Tim Congdon’s ridiculous criticisms of bank regulation.

In this article, Congdon says that bank regulation will constrain bank lending and reduce what he calls “money balances”. I’m afraid that is not the revelation of the century.

To put the point more accurately, more regulation will reduce bank lending and money balances ALL ELSE EQUAL. And therein lies the flaw in his point. I.e., all else does need to be equal.

That is, if regulators decide that the amount that loss absorbing bank creditors have to stump up per pound or dollar of bank lending / investment should be doubled, then clearly that has a deflationary effect. But that’s easily countered by having government and central bank create and spend more money into the economy.

The effect of that is to increase the cash balances of every household and firm, thus the latter WON’T NEED to borrow so much. To that extent, reduced bank lending doesn’t matter.

Congdon then says, “Further, the more zealous regulators are in eliminating risk from bank balance sheets, the more rapid is the destruction of money balances.” Well poor old Tim must be having fits at the full reserve proposals put by Laurence Kotlokoff, Positive Money, Prof. Richard Werner and others. Reason is that the latter proposals pretty much remove ALL RISK from bank balance sheets (the risk is loaded onto depositors who want to behave in a commercial fashion: i.e. have their money invested).

Now personally I don’t see much wrong with removing risk from bank balance sheets: risk which is actually born by the taxpayer. And that risk taking amounts to a HUGE SUBSIDY of the banking industry. Personally I think there is NO EXCUSE WHATEVER for subsidising an industry which ought to pay its own way. But if Congdon has good justifications for that subsidy, I’m all ears. I’ve read several of his publications and don’t remember him justifying mega bank subsidies, but I might have missed something.


  1. The biggest subsidy to banking is the use of collateral.

    And which inadvertently then creates a systemic link between the price of assets and the amount of lending (and therefore economic growth given that the government has bound its hands on the spending front).

    That systemic link could do with breaking. Lending should be on an unsecured basis - which then puts it on a part with equity investment.

  2. Dont understand: if you're saying banks should make loans not secured by collateral, then of course banks take an equity stake in borrowers businesses. And that involves counting a household with a mortgage as a "business". But in that case the risks taken by banks are even bigger.


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