tag:blogger.com,1999:blog-2277215496195926573.post8914969869939403403..comments2024-01-01T07:41:51.347-08:00Comments on RALPHONOMICS: The mistake made by Martin Wolf and bank regulators.Ralph Musgravehttp://www.blogger.com/profile/09443857766263185665noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-2277215496195926573.post-76137165876799494392014-11-01T06:25:47.554-07:002014-11-01T06:25:47.554-07:00So, if we ignore the protection offered to deposit...So, if we ignore the protection offered to depositors, and raise the capital requirements on banks, real costs to society are the same but the apparent cost will increase to particular consumers (borrowers). I agree with that.<br /><br />I think the question is: how can you ignore the apparent cost, when that is the vehicle for delivering monetary policy (rightly or wrongly)?<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-42979920255249731622014-11-01T05:36:55.569-07:002014-11-01T05:36:55.569-07:00Yes, clearly if government offers protection to de...Yes, clearly if government offers protection to depositors, protection which is not offered to shareholders, that skews the market. It means that MM does not work in the real world, or at least it does not work as theory predicts. But if you “skew a market”, then APPARENT costs (i.e. prices) do not equate to REAL costs. And if we’re going to maximise GDP, we should consider REAL costs. I.e. we should ignore the above protection offered to depositors.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-11320903748202088902014-11-01T04:52:05.580-07:002014-11-01T04:52:05.580-07:00I think what I am saying is that government interv...I think what I am saying is that government intervention in the banking market has caused debt funding to be relatively cheaper to banks than equity funding, such that MM does not apply.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-45539024855084119232014-11-01T01:50:30.467-07:002014-11-01T01:50:30.467-07:00Yes, obviously where a bank is funded by sharehold...Yes, obviously where a bank is funded by shareholders and depositors, the former carry a larger risk. But as Modigliani and Miller rightly pointed out, if the shareholder to depositor ratio is changed, there is no change to the OVERALL risks involved in running a bank. Ergo raising capital requirements should not have any effect on the total charge made for carrying those risks.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-26169093927027422342014-10-31T11:02:52.000-07:002014-10-31T11:02:52.000-07:00The cost of debt is lower than the cost of equity ...The cost of debt is lower than the cost of equity to a bank. The reason for this is that depositors do not expect or receive the the full risk premium connected with their loans (either because they misunderstand the nature of a deposit or they think the government will bail out the bank). Equity investors, however, understand the true risk premium with investing in banks - and demand a higher return in order to induce their investment. They know that when banks go down, equity tends to end up with less of the cake than the debt (depositors).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-51954261106704148612014-10-30T05:29:56.550-07:002014-10-30T05:29:56.550-07:00I dealt with that point in section 1.4 of the pape...I dealt with that point in section 1.4 of the paper / book featured in the left hand column: “The Answer is Full Reserve….”. Basically my answer is that tax is an entirely artificial imposition, thus for the purposes of working out REAL costs and benefits, it should be ignored.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-12660676057931858822014-10-30T05:21:00.698-07:002014-10-30T05:21:00.698-07:00Good question. My answer is “no”. However I’ve got...Good question. My answer is “no”. However I’ve got some opposition. Under Milton Friedman’s version of full reserve he says lending entities can be funded by shares or “debentures” as he calls them (that’s bonds). <br /><br />And under Positive Money’s version of full reserve, lending entities or “investment accounts” as I think they call them, are funded by depositors to some extent. (I mention depositors because they have something in common with bonds: both represent a liability of a bank which is fixed in value (inflation apart) – as distinct from shares which have no set value.<br /><br />I don’t think deposits or bonds should be allowed. Reason is that the mere fact of allowing them makes it possible for a lending entity to go insolvent. In contrast, and entity funded by shares just can’t go insolvent (as George Selgin pointed out). Plus as regards depositors, if they want totally safe deposits, they can go for PM’s safe accounts, or the equivalent under Friedman or Kotlikoff’s full reserve systems.<br /><br />But I’ll be expanding on that in a paper I am publishing in a week or so, and which is a response to a discussion paper published by Sir John Vickers in 2012.<br /><br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-39480756760803934032014-10-30T03:42:08.292-07:002014-10-30T03:42:08.292-07:00Banking is one of the sectors where Miller-Modigli...Banking is one of the sectors where Miller-Modigliani is known not to apply. It doesn't really work anywhere because of the differential tax treatment of equity and debt.<br />Gobanianhttps://www.blogger.com/profile/06624944704653618487noreply@blogger.comtag:blogger.com,1999:blog-2277215496195926573.post-77120830083958815832014-10-30T03:35:19.362-07:002014-10-30T03:35:19.362-07:00Very sweet reasoning!!
Is it also OK to have full...Very sweet reasoning!!<br /><br />Is it also OK to have full reserve for instant/quick access deposit banks, with lending entities financed by both equities and bonds (not just equities)?KongKinghttps://www.blogger.com/profile/10992633301481631373noreply@blogger.com