Wednesday, 19 August 2015

Greenspan backs substantially higher bank capital.

That’s in this Financial Times op-ed. Quite what qualifies Greenspan to write articles on this subject is a mystery, given the part he played in setting up a bank system that collapsed and cause chaos in 2007/8. For more in Greenspan’s incompetence, see here and here.

Anyway, good to see him come round to the view that Dodd-Frank is a waste of ink and paper and that higher bank capital solves the problem. That “substantially higher capital” view is shared by Martin Wolf, chief economics correspondent at the FT and Anat Admati. That is, the two latter advocate something like a 25% ratio: much higher than the ratio contemplated by the current lot of regulators.

Hopefully Greenspan, Wolf, Admati and others will next ponder this question / conundrum, which will get bank capital right up to the 100% level, which is what’s involved in full reserve banking. The question / conundrum is this.

If, having raised capital ratios to the 25% or so level governments still say they’ll rescue banks in the unlikely event of failure, that constitutes a subsidy of banks, and subsidies misallocate resources. So that’s not permissible if we want to maximise GDP rather than featherbed bankers.

Alternatively, if government  completely washes its hands off banks the same way government makes no undertaking to rescue garages or restaurants in trouble, then all of those who fund banks in effect become shareholders, even if they call themselves depositors or bondholders. At least they become shareholders in that, at worst, they stand to lose their stake in a bank. And that equals a 100% ratio, which to repeat is what’s involved in full reserve banking.

For more on that point, see here.

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