Saving Banks

[Jon Miller]

I understand why saving/supporting banks is good economic sense.

And saving/supporting banks isn't just 'bailouts', it is also very low interest loans to them (which for some reason is considered 'normal' behavior).

But in a capitalist system, which is otherwise supported, and is the excuse for why a lot of misery is allowed ("well, that is capitalism, it is required"), what is the defense for saving/supporting banks? Especially when often they are so very profitable.

If the free market/neoliberal system means that you have to save/support the banks, doesn't it mean that the free market/neoliberal system is inherently dysfunctional? That it is really just saying "bankers/etc should be internationally protected industries while local industries ( which is basically labor) should not be protected"?

Is such a system ethically defensible, even if it results in the greatest GDP growth?

JM

[The Mad Monk]

Banks should be allowed to fail, like most other concerns.

[dannubis]

Banks should be allowed to fail, like most other concerns.

Yes, but preferably not all at once...

[C0ckney]

Banks should be allowed to fail, like most other concerns.

but then western civilisation will collapse!!!!!

at least that's what they told us in 2008...

[The Mad Monk]

[Fake Boris]

Classless societies are not possible. Get used to it...

[Jaguar]

I'll have time to post on this more later, but it should have been possible for the Federal Reserve to stop the hemorrhaging of all of the credit markets at once, saving both the banks and the regular people equally. This would have been infinitely preferable to what we ended up getting.

Ben Bernanke, as a professor, knew what needed to be done in this sort of situation, but he was unable to implement it in practice as the Chairman because he has a relatively deferential personality, and many members of the board are both stubborn and not as bright as him.

You've identified the correct thing to complain about here.

[Fake Boris]

Then please come back ASAP

[Jon Miller]

Should that be done by:

1. Increased bank regulation
2. A public bank that only lends (but does not save/support), when all banks fail, people go to it... theoretically in 'standard practice' private is more efficient and people will go to private when it is available again
3. ???

One thing that happens is whenever the state sells assets, a few people with information asymmetry make a ton of profit, and the people lose on the deal (get less than the asset was worth). This is even if the economics works, and overall economy/efficiency improves a lot by the trade.

So I am not in favor of the state making a bank when the banks go bust, then selling it, and so on.

JM

[Jon Miller]

I'll have time to post on this more later, but it should have been possible for the Federal Reserve to stop the hemorrhaging of all of the credit markets at once, saving both the banks and the regular people equally. This would have been infinitely preferable to what we ended up getting.

Ben Bernanke, as a professor, knew what needed to be done in this sort of situation, but he was unable to implement it in practice as the Chairman because he has a relatively deferential personality, and many members of the board are both stubborn and not as bright as him.

You've identified the correct thing to complain about here.

Is this something that can be implemented in the european markets too?

JM

[Bugs ****ing Bunny]

Quite a few of the banks involved were "failing" due to an acute illiquidity crisis rather than more fundamental failings. On those banks, the governments doing the bailing out will probably end up making profit. So in those cases there was a sound logic to bailing them out.

[Jon Miller]

Many companies fail due to not being able to get credit/etc.

The government does nothing.

But this is not all I was talking about.

JM

[Jaguar]

As promised, now that I'm off work, a longer post on Bernanke and saving the banks. I've written on this subject before, clearly.

I. Hey Guys, Remember When The Nominal Economy Was Actually Predictable? That Was Pretty Cool, Right?

The long-term deals we make every day in the economy show an absolutely extraordinary level of trust in the dollar. The fact that 30-year fixed-rate mortgages even exist is astounding. You get a house in exchange for a stream of payments in a fixed quantity of paper notes that have no intrinsic value and are backed only by fiat.

The reason this works is that the exchange value is fairly predictable. If you asked someone in 1987 what he thought the nominal GDP (combined income of all people) in 2005 would be, he'd come very close to nailing it, just by continuing the trend line. If you asked him what the CPI would be, he'd pretty much nail that as well. This is someone making predictions before I was even born and they would be near-perfect. That's why people placed so much trust in the system - because it was genuinely predictable. The Federal Reserve works behind the scenes to make it that way.

You can see how that predictability broke down in 2008. As a result, nominal income is maybe 11% below what someone in 2005 would have expected, and price level is maybe 8% below. This throws off existing long-term arrangements denominated in dollars, such as wages, pension funds, business loans, and - especially in 2008 - mortgages. These arrangements became unsustainable because they were made based on expectations about the nominal economy that turned out to be false. Housing was the first place where nominal-dollar arrangements broke down, because they involved very large loans to to highly-leveraged individuals, and because houses were the first prices to start falling.

II. Initial Federal Reserve Mistakes in 2008

It was a huge mistake to allow price levels to tumble so far. So why we let that happen? The Federal Reserve was sluggish to respond to the crisis, in part because they got caught in a trap where oil prices and housing prices, two of the absolute biggest sectors of the economy, were moving in opposite directions in early 2008, and they could only bring one of them back into line. It was like a 7-10 split in bowling. It became clear ex post facto that housing was the more important effect, but even given the wisdom of the time, the Fed should have been faster. It didn't even reduce interest rates fully until the end of 2008, when everyone already knew something was very wrong.

III. Professor Ben Bernanke

We're four years now from when house prices began to drop. We don't have imminent failures everywhere, but something is still wrong. We have low interest rates, low inflation, low employment, and low growth, despite being long-removed from the initial causes of our malaise. Japan's "Lost Decade" had similar economic characteristics. Professor Ben Bernanke of Princeton University wrote extensively on Japan's lost decade.

His argument was that the Bank of Japan's monetary policy was tight. People less intelligent than he would counter that interest rates in Japan were virtually zero - "as low as they can go" - and that therefore Japan's central bank was doing all it could. But Bernanke understood two things. First, that interest rates are just one means of communicating your methods, and there are other ways of showing how much you would like to expand the money supply. Second, that the important thing in monetary policy is not the usually-trivial numbers of open-market trades you make - but rather, it is the ability to signal commitment.

If you think that nominal levels need to rise or fall, it should be a demand, not a suggestion - a demand backed by your unique control over the currency. Bernanke concluded that with some determination and some "unconventional" monetary policy, Japan could restore itself to full employment, but that its central bank lacked that determination:

Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan.

IV. Perhaps it's time for some Rooseveltian Resolve in the United States

Less than a decade later, Ben Bernanke was the Chairman of the Federal Reserve, and he got a crisis that led him to the same situation about which he wrote so eloquently. But instead of saying "this is my moment, I know what to do here. Everybody back off - I got this," his policies have been timid. He is only willing to adopt a policy if there is a 7-3 majority vote in favor of it. He is rarely willing to use the unconventional tools he advocated, and only in dire circumstances - such as deflation or the imminent collapse of the banking sector. Even then, he forgets the lesson of resolve. He doesn't make demands backed by his ability to change the money supply; rather, he announces incremental open-market policies he will conduct, and says he will "wait and see" after those actions are taken. Even the Fed's statements show a lack of resolve:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

Seriously? He expects low resource utilization and low inflation, and he expects that condition to persist, and the best he can do is to humbly offer that he will continue doing the same things he's doing now.

Bernanke only showed resolve when it came to saving the banks, and he did that successfully. Ironically, as a professor at Princeton, he discussed that very same sort of operation with Japan, and decided that "non-standard open-market operations" with a "fiscal component," an "implicit subsidy" for particular banks, should probably not be in the central bank's legal authority. Implicitly he preferred increasing the money supply and liquidity across the board, which would help detoxify all Yen-denominated debt equally.

I don't begrudge Bernanke for changing his mind on the issue and doing more to help the banks in the moment of crisis. Any implicit subsidy was a speed bump in the grand scheme of things. But we can hold a considerable grudge against him for not showing that same resolve when it came to the rest of the economy.

[giblets]

Many companies fail due to not being able to get credit/etc.

The government does nothing.

But this is not all I was talking about.

JM

Typically a business would be denied credit because it can't convince a bank that the business would be able to repay the loan, right?

[Jon Miller]

Typically a business would be denied credit because it can't convince a bank that the business would be able to repay the loan, right?

You haven't apparently been paying attention to recent economics.

A large part of the reason why they are trying to 'prop' up the banks is so that banks will be willing to loan to good bets which they are not currently.

JM