tag:blogger.com,1999:blog-2277215496195926573.post1871875171792810409..comments2024-01-01T07:41:51.347-08:00Comments on RALPHONOMICS: Mervy King’s bizarre arguments against very high bank capital ratios.Ralph Musgravehttp://www.blogger.com/profile/09443857766263185665noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-2277215496195926573.post-69489747906905561442016-05-02T10:34:23.472-07:002016-05-02T10:34:23.472-07:00I have finally finished the book.Large parts of it...I have finally finished the book.Large parts of it I agree with, the rest as you say is odd.To criticise the cost/disruption of implementing full reserve banking is a cop out I agree.No one likes new rules,eg many did not want to be forced to wear saftey belts,but they save lives.<br /><br />Besides if these Masters of the Universe at our banks are so clever and make so much profit(based on the bonuses they awarded theselves)this cost will be a mere blip.<br /><br />Things that are worth looking at in this book;<br /><br />Gross market value of derivatives is around one half of assets of the largest top 20 banks in the world.i.e equal to all lending to households and businesses.A lot of these will be basically insurance and based on various triggers.What is allowed as an asset seems to be a problem for me here.<br /><br />Mutuals that converted to banks after 1990 all failed in the crisis.<br /><br /><br />Leverage is a better measure of a banks risk than capital ratios.(a rule of thumb)<br />eg Northern Rock had best RWA's in the UK in 2007, yet went bankrupt 3 months later.<br /><br />Regulation has become "extraordinarily complex",not many people understand them.He uses the 15 minute rule used by one bank,if you cannot pitch the idea to a group of peers in 15 minutes the idea is binned.As he says, "complexity is inefficient".<br /><br />Finally and this is the most important one for me;<br /><br />It is hard to step in and "impede" growth is asset prices,(since this is not a current concern of central banks)It is anentirley different thing though to step in and provide liquidity in a crisis ....which is basically what he proposes in his book.So we are left with a position where he does not see role for controlling asset prices,which is odd as I would say that is what inflation is.Only house prices and share prices, that caused much of the problems, are not in the basket of inflation measures.<br /><br />This is the biggest obstacle we have to changing the current system.No one belonging to the establishment wants to interfere in what they see as a free market,even if that free market is not good for the the economy as a whole.<br />Anonymoushttps://www.blogger.com/profile/14758456556310738132noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-4525896232665499782016-03-15T08:45:28.357-07:002016-03-15T08:45:28.357-07:00Alchemy;
"the medieval forerunner of chemist...Alchemy;<br /><br />"the medieval forerunner of chemistry, based on the supposed transformation of matter. It was concerned particularly with attempts to convert base metals into gold or to find a universal elixir."<br /><br />King's deinition is rather dated one for a start,but I supppose when he was an apprentice central banker he filled out ledger books with a quill and ink.<br /><br />Paper money??...really?We do not use paper money much now thanks to electronic banking.It was not paper money that caused the last crisis.The state had to print alot of what used to be paper money to get us out of the problem.So that isn't the problem.<br /><br />So half of is defintion is redundant.Getting to the second bit it hardly improves.What he should have said is the commercial banks have turned state backed money,(that which was once backed by gold but is now backed by something much more valuable; the labours of an entire nation) into commercially issued money that carries the same trust and authority as if it was in fact state money.<br />This is in effect the same as turning privately created money (that is created out of nothing) into(what was once)gold.<br /><br />Ok its not catchy,but it fits the definition of alchemy far better.Anonymoushttps://www.blogger.com/profile/14758456556310738132noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-39573418544002510802016-03-14T04:37:56.637-07:002016-03-14T04:37:56.637-07:001. Fair point. I was using the words equity and &q...1. Fair point. I was using the words equity and "share" in a very broad sense: to include debentures or bonds where (when the worst comes to the worst) investors can lose all their money: as distinct from deposits, where savers are absolutely guaranteed not to lose out. Should have made that clear.<br /><br />2. King actually contradicts himself. He says wide banks are funded by equity or long term debt (as I point out above), but then says that those banks can “borrow short”. <br /><br />3. My answer is that letting wide banks be funded partially by bonds that can’t be bailed in just opens up the possibility of insolvency, and that means disruption, plus that disruption achieves nothing, not even for shareholders or bond-holders. Reason is thus.<br /><br />Assume (to keep things simple) that the value of a bank’s shares are strictly related to the value of its assets, and those assets fall to the point where shareholders are wiped out and there are only enough assets to pay bond-holders Xp in the £. If those bonds can be bailed in, then bond-holders get Xp in the £. Alternatively, if the bonds are “non-bail-inable” and the banks goes insolvent, then after the assets have been sold, bond-holders will again get Xp in the £. Obviously I’m ignoring the costs of the bail in process and the insolvency process for the sake of simplicity.<br /><br />Conclusion: bonds that can’t be bailed in achieve nothing apart from dislocation of the Lehman variety.<br /><br />Furthermore, the whole bail in process is fraught with problems. E.g. come and crisis, and in the heat of the moment, bond-holders with political connections my use their connections to escape hair cuts. Indeed, as I understand it, bond-holders with political connections in Europe managed to do that in the recent crisis.<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-60119705117686756762016-03-13T22:32:34.505-07:002016-03-13T22:32:34.505-07:00I haven't read King's book, but I broadly ...I haven't read King's book, but I broadly agree with your reactions.It seems that King is very close to advocating full reserve narrow banks, but somehow he loses the plot in a tangle of words.<br /><br />Here are a few point on your article.<br />1. As you note, Friedman's view was that "a transition from our present system to 100% reserves" could be achieved "easily, fairly speedily and without any serious repercussions". This relates to a zero loan/full reserve requirement for NARROW (transaction) banks. This does not imply a 100% capital ratio for WIDE (investment/loan making) banks. Regarding the latter, as you have previously noted, Friedman thought these could be financed by a combination of equities and debentures.<br />2. King says “Although wide banks cannot create money in the form of deposits, they can still borrow short and lend long.” Presumably he simply means that wide banks can borrow at shortER terms than the loans which they make. If so, your comments "Complete nonsense. ..." do not apply.<br />3. A 100% equity capital requirement for wide banks would indeed remove virtually all danger of them going bust. But why not let wide banks have loan capital and risk going bust if the shareholders and the bondholder investors wish to take the risks. Its not obvious that 100% equity for wide banks would lead to a better mix of investments in the real economy.<br /><br />KongKinghttps://www.blogger.com/profile/10992633301481631373noreply@blogger.com