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Cianfrocca on the usury crisis

Here is a brilliant post by Francis Cianfrocca on the continuing credit crisis. His analysis ranges widely, from Europe to America and back, while still effectively focusing on certain points of shared emphasis. One is that so much of world capitalism no less than world governance is bound up in the principle of protecting private creditors. That principle is at the root of TBTF.

Another point of emphasis, or rather point of recall, concerns the recollection of the plain pulverizing fact that it was Treasury Secretary Paulson’s commitment to liquidationist ethics — that is, a principle of nonintervention which permits even the old and venerable to fail — at the moment of crisis when Lehman Brothers tottered on the brink in Sept. 2008, which triggered the panic that enshrined TBTF for good. Paulson tried to hold a line against the rescue by taxpayers of private capital, tried to call the high finance bluff; but he failed. And in the end, Lehman’s fall and the subsequent tumult of that entire autumn put such a scare in policymakers as to remove such a gambit from toolkit of Western statesmen for the foreseeable future.

Below the fold is a big chunk of Francis’s fine essay. But read the whole thing.

You’ll notice more than a few striking similarities in this to the 2008 crisis touched off by the failure of Lehman Brothers. (To point them all out would be another long post.) Then as now, the primary fear of policymakers was to avoid a “credit event” that would produce a cascade of capital losses among large, interconnected financial institutions. In other words, a meltdown.

At the moment, there are no indications anywhere in capital markets that such an event is imminent. This contrasts sharply with the deeply disordered conditions that prevailed from the summer of 2007 right up to the events of September 2008.

At that time, Henry Paulson drew his line in the sand and told the world that Lehman Brothers would not be supported by extraordinary efforts of US policymakers: Lehman would not be bailed out. Paulson and his team went to tremendous lengths to browbeat other institutions into mergers. But no one was willing or able to acquire Lehman.

Paulson here was trying to do the right thing, but he of all people must have understood that he was threatening the most important assumption in the whole global financial system: PRIVATE CREDITORS NEVER TAKE LOSSES.

It only took three days after Lehman failed for it to become evident that the fallout from that event (which directly affected perhaps one trillion dollars’ worth of assets) would be enough to end the global financial system, and quite likely halt the global economy. That’s the situation that was addressed by TARP, and by a whole raft of asset-purchase programs by the Fed.

Conservatives who think they understand finance like to say that TARP was a huge disaster. Very few of them have any clue that the Fed’s programs were a far larger “disaster” of the same type as TARP. And it’s the same type of thing that the ECB and IMF may now be about to undertake on behalf of Greece.

The fundamental nature of all these rescue programs is to use “social” money (which is ultimately guaranteed by taxpayers) to force up the value of assets that are impaired or valueless. The objective of the rescues is to ensure that PRIVATE CREDITORS NEVER TAKE LOSSES.

In the presence of an open-ended official buyer, holders of Greek debt could either tender (and take an enormous capital gain from current market values); or hold their debt and benefit from the huge interest rates without having to reserve large amounts of regulatory capital against it.

Of course, if the full bailout of Greece happens, the people of Greece will take it in the neck, with onerous fiscal-austerity requirements. They’ll suffer a permanent reduction in living standards, in order to pay back their old debts.

Policymakers will strongly prefer this course of action, and primarily for this reason: because it will allow private creditors in France and Germany to avoid taking losses. No one wants to see a big name French or German bank become the next Lehman Brothers.

Comments (43)

What does he mean by this, exactly?

One of the thought-experiments I’ve been running is: what if Congress passed a law to allow American homeowners to simply default on their mortgages with no questions asked?

How would this differ from the present situation? Why would it require a law?

Another point of emphasis, or rather point of recall, concerns the recollection of the plain pulverizing fact that it was Treasury Secretary Paulson’s commitment to liquidationist ethics — that is, a principle of nonintervention which permits even the old and venerable to fail — at the moment of crisis when Lehman Brothers tottered on the brink in Sept. 2008, which triggered the panic that enshrined TBTF for good.

I have not read the whole thing, but this caught my eye and demands a response. Let's not beatify (or condemn) Paulson for his supposed noninterventionist principles just yet. The problem with Lehman's failure was not its size, or even its connectedness, as much as it was the surprise of it all - it was only the year before when Paulson, et al, rode to the unconsitutional rescue of Bear Sterns, a much smaller institution, bailing out the creditors of that firm. Surely Lehman creditors were not unreasonable in assuming that if the government wouldn't allow Bear to fail, surely it wouldn't allow Lehman to fail. And even Dick Fuld (whom I have heard referred to on more than one occasion as the Prince of Darkness) might have been more amenable to a reasonable sale to private investors along the lines of the deal he turned down from the Koreans (lucky, lucky, Koreans) had he not assumed that there was no way a government that bailed out Bear could let Lehman go to the wall. He did not recognize how much personal animous he had created and that Paulson's newly rediscovered noninterventionism was driven, at least in part, by his understandable loathing of Fuld.

It was, IMHO, this change in the understood rules of the game, rather than the actual failure of Lehman, that panicked and froze the financial world in 2008.

Paulson's fault was not in asserting free market principle in the Autumn of 2008, but in failing to do so in the Spring.

There is truth in the idea that Lehman has enshrined forever the principle of TBTF, but that must lead to the conclusion (though one that has been avoided by most regulators other than Mervyn King) that TBTF is too big.

He seems sort of...negative (in the "You people just don't know what you're talking about" vein) about people who deplore TBTF and bailouts, yet at the same time he himself seems to deplore the "private investors must never lose" principle, which would seem to be related to deploring bailouts! He even says Paulson was trying to do the right thing when he refused to bail out Lehmann, so...

I'm afraid that to an untutored eye like mine, all of this looks a bit snobbish. It gives rather the impression that anyone on the right who discusses this matter with Cianfrocca is in a no-win situation, unless that person advocates the _precise_ policies he does or, perhaps better, sits back and refuses to advocate anything, including the end of TBTF.

it was only the year before when Paulson, et al,

Sorry - that should have been "only that spring . . ."

It was a very long year.

Lydia, I agree with your sense of the piece. In particular:

The point here is that the expansion of credit is what has stood behind the broad-based economic growth of the three decades to 2008. If bankers didn’t take more risk (with implicit government guarantees), then growth would not have been so strong. There has been clear political support for credit-driven growth in the developed economies for decades now.

This is overly simplistic to the point of being simply wrong. For a much better analysis of the drivers of growth historically and in the three decades since 1980, I recommend:

http://www.americanexperiment.org/publications/reports/recessions-and-recoveries

It was a very long year indeed. And I agree with John S. that personal animus played a large role. I certainly do not mean to beatify Paulson; only to point out that his decision to let Lehman perish was the trigger for the 2008 panic.

He deplores the principle because he regards Wall Street and much of high finance as parasitic. He's a businessman not a banker. And he grows inpatient with conservatives who mistake the banking interest for the interest of free enterprise.

And he grows inpatient with conservatives who mistake the banking interest for the interest of free enterprise.

Well, isn't it a little convenient for giving the impression of superiority over conservatives to be impatient, at the same time, with conservatives who would be willing to let the banking interests suffer their own losses rather than being bailed out? I mean, which of those is the stupid, naive, pro-free-market perspective which Those Who Know Better are able to rise above? The two don't even seem compatible.

And he grows inpatient with conservatives who mistake the banking interest for the interest of free enterprise.

I am sympathetic with that view, but note that bankers are not alone in wanting reedom to prosper, but protection from failure. Businessmen are constantly seeking advantage and capturing the levers of policy influence is an obvious one. And elected officials are only too happy to exchange government largesse to various beneficiaries in exchange for campaign contributions - it helps if you can come up with a story about how it is in the public interest.

I get the almost inexorable impression from articles like Cianfrocca's that there is some sort of secret Masonic handshake here--perhaps consisting of a free use of terms like "plutocracy" and a resolute refusal ever to say that one "favors free markets." If one knows the passwords and becomes a member of the club, one is then permitted either to support or to oppose bailouts, or to support them in some cases and not in others, or whatever. If one doesn't know the handshake, and if one is perceived as coming from the right, _whatever position one takes_ will be looked down on as proceeding from naive conservatism.

Businessmen are constantly seeking advantage and capturing the levers of policy influence is an obvious one. And elected officials are only too happy to exchange government largesse to various beneficiaries in exchange for campaign contributions

You'll find no argument from me on these points.

Lydia, I'm sure if Francis came here arguing a point of analytic philosophy that you disagreed with, you would not hesitate demonstrate your superior knowledge of the subject to expose his error.

High finance has become a realm of the most extraordinary sophistication. For twenty years some of humanity's greatest scientific minds have been dedicated to it. I wouldn't dare utter an opinion on these matters if I didn't have friends like Francis (and another mutual friend) whose knowledge and experience permits me to truly check and revise my intuitions and impressions.

Paul, my objection is to the fact that the conservative interlocutor apparently *can do no right* according to F.C.'s article. If, on the one hand, such an interlocutor supports bailouts, well, then, he's obviously just upholding that principle Francis is deploring--that private investors must never lose. If, on the other hand, such an interlocutor opposes bailouts, well, that's supposed to be wrong, too, though I must admit that the reasons given in the article for its being wrong are more than a little obscure. And not, I think, because they are highly technical. Just because they appear to be more allusive than anything else: "Oh, you oppose bailouts? Well, did you know that the government encouraged risky behavior by investors? Do you know how much of the growth of the last few decades has depended on the expansion of credit?" Even granting these premises, it hardly follows that a conservative is _not allowed_ to oppose bailouts! Yet he talks as if it does. Whatever I don't know about economics, I'm afraid that's a poor argument.

More strikingly, when conservatives aren't allowed by F.C. either to support or to oppose bailouts, then something is wrong. This cannot be a mere matter of his having expertise that his hypothetical conservative interlocutors lack. And it is this "conservatives who aren't me can do no right" impression that makes the article frustrating, at least to me as a reader.

Here's an article that implies that in at least ten states, it's perfectly possible to default on one's mortgage without losing other assets:

http://online.wsj.com/article/SB126040517376983621.html

If such state laws spread and such defaults become more common, I would guess (correct me if I'm wrong) that the pressure further to bailout banks would get stronger. So without an anti-bailout principle in place, the "people could just default and the banks could take the hit" idea isn't going to make much difference to the "private investors must never lose even if they have to be bailed out by taxpayers" principle. At least, so it seems to me off the bat.

In any event, I'm still wondering whether a person who uses the phrase "free market" and doesn't use the term "plutocrat" is permitted to oppose bailouts. That's part of what's so confusing about the C.F. article. He sounds for most of it like _he's_ opposing bailouts but seems not to approve when the people he identifies as "conservatives" do so.

A different prospective on what the Crash of 2008 was really about. This view describes the event as the mother of all margin calls by the top four banks which control the bulk of the over-the-counter derivatives markets. In other words, the massive liquidations of 2008 were the result of institutions selling off portfolios to meet this margin call, they were not the result of the Lehman bankruptcy. If something like what's described here is true of the world financial markets then it underscores even further the need for a global reference point wealth asset for institutions and individuals which lies outside the financial system.

http://londonbanker.blogspot.com/2011/05/concentration-manipulation-and-margin.html

That's "perspective"

I echo Lydia's frustration with the article. He's one of the financial elites and we poor rubes don't know stuff. As far as the analogy with other technical fields such as analytical philosophy, I'd say Paul's analogy only holds true where there is the same sort of elitism, which is never good. Even in the most highly technical fields, explaining matters to non-specialists simply must be done or one has no credibility. The most brilliant engineer simply must run his ideas by non-specialialsts. If he can't he simply isn't any good. Non-technical folks may not know this is the rule in business, and may think the more brilliant one is the one non-specialists can't hope to understand, but this is just a fallacy. Even philosophy of the most highly technical sort was this way (written for laymen) before it became professionalized fairly recently, which wasn't a good thing.

And though I suppose myself at least as appreciative than the average person of what our economic growth provides us, I am just disgusted by this "oh but we wouldn't have had such a growth rate without thus and such bad ideas." We should roundly condemn illegitimate growth. We need to put a stake through Keynesian economics, or whatever it is that tells us that non-sustainable growth is good _in_any_respect_. It isn't. The truth is that if the US is a better place to do business then *whatever our growth rate is* it will be higher than other nations, and it is the competitive advantage compared to other nations that matters most. We can't control the actual growth rate. In my view the root philosophical problem in all this is that people think they can buy growth by spending or shifting money around and that is just false. Growth comes from making better goods and services, and it is a long-term venture. Trying to get more growth directly is like trying to be more popular. It is counter-productive in the end. The best we can do is provide an environment where entrepreneurs and companies can grow if they do the hard work of doing the right things. Unfortunately, people now have the view that government creates or provides growth, and it doesn't and can't.

What annoys me about the growth argument is the weird assumption that somehow this should _shut up_ conservatives who oppose bailouts. I mean, why? It's like the person who brings it up--in this case, C.F.--thinks he has a signed paper somewhere saying, "I, Joe Conservative, do hereby pledge myself never to support or propose any policy that would, if followed, have resulted in less apparent economic growth during a preceding period of American history." And like this is true of any randomly selected conservative who might oppose high debt and bailouts.

It's an "aha" attempt that, to my mind, falls somewhat flat. And it _especially_ falls flat if C.F. himself opposes bailouts. It's like refusing to take "yes" for an answer. There's a sentence in the article that goes something like, "Conservatives who think they know something about finance [I kid you not, that's almost word for word] think the TARP was a disaster, but they don't realize that other Fed programs were a greater disaster along the same lines." Now, for one thing, where's the "and they're right" in the first part of the sentence? I'm sorry, but if that's what he thinks, his not saying it gives the impression along with other aspects of the article that *we must never say that conservatives who think they know anything about finance are right*. Moreover, he doesn't, at least not there, give a clear example of the Fed programs he means and their similarity to the TARP. And if he did, and his imaginary conservative interlocutor agreed that they, also, were disasters, then that should be great, right?

Then, of course, there's the interesting point that John S. brought up that evidently "conservatives who think they know something about finance" aren't in any event bound to accept as revealed truth that some gigantic proportion of apparent growth for the past three decades was driven by unsound lending and borrowing.

I totally agree Lydia, in light of this thinking it seems not hyperbolic to say we need to stop "worshiping at the altar of growth." Growth is great when it comes from creating a superior good or service, or having a national competitive advantage with other nations business environments and such but otherwise it is unsustainable and not to be pursued at some ultimate good.

I think my earlier point could have been summed up more briefly by saying the problem we have now it is that too many of us think we're entitled to a certain level of prosperity, so that if that highly subjective goal is seemingly threatened we're supposed to buy into any scheme that might deliver us from the lack of prosperity we think we should have. The fact that these schemes never work is particularly galling in such an acceptance of this therapuetic method.

And just to hammer my distaste for the "(financial) elites know best" idea yet again, what we need are accountable conservative financial men and women who don't think they are the "best and brightest." Think of Richard Feynman, on the expert panel on the Challenger explosion who wars irritated that the experts on the panel weren't dealing with the root cause and grabbed a clamp and a glass of ice water and did an experiment during his talking time and said "there is the problem." Had this not been done on national TV, the experts might have rolled their eyes at such dramatics and carried on in bureaucratic drone-speak to a less effective conclusion. To be an elite as far as technical skill is one thing, but to claim to be an elite as far as wisdom and judgment over non-specialists is entirely another and that is where elitism is poisonous.

Well, to be precise, Feynman _was_ one of the experts. His frustration was caused by the many blocks--bureaucratic and political--to his acting _as_ an expert and finding and reporting the problem promptly. He was cued in privately to the problem with temperature and the O-rings by a general who (if I recall correctly) worked for NASA. Feynman, naturally, saw what this meant immediately but knew that if he tried to wait and report it in the ordinary fashion they were being encouraged to use, it would take forever and might be buried, so he did it in a dramatic and simple way before the Press during a NASA Q & A. It wasn't so much an experts vs. non-experts problem as a bureaucrats vs. no-nonsense scientist problem.

High finance has become a realm of the most extraordinary sophistication.

Just a couple of questions. In all seriousness, what is low finance?

I think economics is so hard because people make it hard. There seems to be a perversity in the human condition, probably the result of Original Sin, that says that two people cannot be simple and reasonable when it comes to money. The Lord of Heaven and Earth could explain economics to the simplest of children and I suspect that if the man-in-the-street knew what really went on in board rooms and accounting offices there would be rioting in the streets. Why is that?

The Chicken

Low finance? I suppose that would be the piggy bank.

As for the rest, when describing why specialists in any field actually try to be incomprehensible, it's a little thing called "pride". As for the boardrooms and accounting offices, you are correct.

In my view the root philosophical problem in all this is that people think they can buy growth by spending or shifting money around and that is just false. Growth comes from making better goods and services, and it is a long-term venture. Trying to get more growth directly is like trying to be more popular. It is counter-productive in the end. The best we can do is provide an environment where entrepreneurs and companies can grow if they do the hard work of doing the right things. Unfortunately, people now have the view that government creates or provides growth, and it doesn't and can't.

I think Francis would agree with most if not all of that. His rhetorical efforts have by and large concentrated on the goal of restoring the proper balance between business (actually producing tangible goods and services) and finance. The latter is always a vital part of a capitalist economy; but over the past generation or so it has grown enormously, recklessly, way out of proportion of its natural role, and with the connivance of government.

Lydia, Francis supported the TARP, and has defended his position numerous times since 2008. The Fed interventions were the support for money markets, for commercial paper, QE1 and QE2, the permanent extreme low interest rates, the expansion of the discount window to include investment banks, etc. In full, their nominal value exceeds that of the TARP by an order of magnitude. Bloomberg calculated something like $8 trillion at one point in late 2008.

It wasn't so much an experts vs. non-experts problem as a bureaucrats vs. no-nonsense scientist problem.

Right. The question is, what type of expertise is one claiming in a particular judgement. Feynman was a member of a technical elite, but the problem could be stated in such a way that non-members of this group could understand. The problem is when technical elites act as experts in things outside their field of expertise either explicitly, by condescension (being unwilling to explain themselves to interested parties,) or simply by incompetence (not understanding the limits of their disciplines,) thereby promoting a view that technical expertise confers wisdom and good judgement.

Francis supported the TARP

Okay, I conjectured that even just from this article but do find in that case that his comments about Paulson's trying to do the right thing by refusing to bail out Lehman are a little confusing.

The Fed interventions were the support for money markets, for commercial paper, QE1 and QE2, the permanent extreme low interest rates, the expansion of the discount window to include investment banks, etc.

And he opposes those? Presumably because they are so much bigger, taken all together?Well, okay, I doubt he'd get any argument from me about those, but, again, he seems to assume that these doggoned conservatives will disagree with him on something here, presumably because he assumes they are committed to growth, even artificial growth, at any price. I've no idea why he should assume that.

Another thing strikes me here, Paul, related to what I've been saying throughout: C.F. supported the TARP but opposes the principle that "private investors must never lose." He recognizes, as the article makes pretty clear, that rejecting that principle will, at some point where the rubber meets the road, require a willingness to accept some potentially sobering economic consequences in order to return to sounder banking. So presumably that means he thinks we should at some point be willing to accept those consequences. In that context, a difference between him and some conservative about TARP would seem to be a difference about implementation and detail rather than about principle. For whatever reason, he opposed drawing the line _just there_. It would seem that reasonable people should be able to differ about that. The "any conservative who disagrees with me about anything in this area--whether about bailing out or not bailing out, or about how, precisely, to manage a transition to sound banking--is just naive or dumb" trope is neither particularly logical (given apparent agreement on the need to be willing to let investors take their own risks and take losses) nor particularly likely to win friends and influence people.

Lydia, my understanding is that Francis supported most of the Fed crisis operations too. No doubt he has plenty of criticism for their details; but his view has always been that after the shock and panic of the Lehman bankruptcy, forbearing to prop up world finance would have been (a) terribly unwise and (b) legally precluded for a Fed Chairman under current law.

I think the impatience he shows in that sentence you've quoted a couple times now is with conservatives who latch on to the TARP as the sign and seal of all that went wrong, while neglecting all the Fed operations that required no statutory authority because "lender of last resort" and price stability are already statutory mandates for the Fed. To stop these Fed operations (most of them, anyway) would have required a massive overhaul, if not outright repeal, of the Federal Reserve Act. If private credit is so frozen that no one will trade commercial paper (thus endangering virtually every major company's ability to make payroll and keep the lights on) then the Fed acting as lender of last resort becomes a directive from Congress.

Well, in that case, Paul, I'm thoroughly confused. Here's what he says in this article about the other interventions:

Very few of them have any clue that the Fed’s programs were a far larger “disaster” of the same type as TARP. And it’s the same type of thing that the ECB and IMF may now be about to undertake on behalf of Greece.

The fundamental nature of all these rescue programs is to use “social” money (which is ultimately guaranteed by taxpayers) to force up the value of assets that are impaired or valueless. The objective of the rescues is to ensure that PRIVATE CREDITORS NEVER TAKE LOSSES.

Now, he does put the term "disaster" in scare quotes. However, he says that all of these rescue programs are based on sticking the taxpayer with the bill so that private investors never take losses, and you yourself have said--and his entire article indicates--that he wants to _challenge_ if not encourage us to _abandon_ that principle. So what's going on here? If he's in favor of all of this, just supports bailout-business as usual and for the future, why go on and on about how terrible a principle it is that private investors must never lose? If he supports all these rescue programs, he doesn't want us to reject that principle. Let the bailouts continue, world without end, amen.

Yet on the other hand, he says he's played with a thought experiment about "letting" homeowners default. (As I mentioned above, this appears to be already entirely possible in ten states, and frankly, IMO, shd. continue to be addressed at the level of state law. In any event, in those states no special new rule is required.) Anyway, he seems to think this might be a good thing to try, yet he apparently wryly says it won't happen because, "Unfortunately, no one wants to take the risk of total systemic collapse that this would entail."

Okay, so that sounds like he thinks we _should_ be willing to take the risk of total systemic collapse in order to overturn the "private investors must never lose" principle. But in that case he doesn't simply support the coninuation of bailouts because some sort of major systemic reactions are unthinkable.

All very confusing.

Antal Fekete wrote recently about the issue of what the Fed is and is not legally allowed to do. Reading this short letter it's not clear to me that the Fed can just, in whatever way, freely create new credit in the name of price stability or its role as lender of last resort. There are laws which must be followed. Specifically, Fekete says for the Federal Reserve Banks to expand credit they must first post Treasury paper, already owned outright and unencumbered, as collateral with the Federal Reserve agent who then authorizes the credit. And he goes on to say in the follow up essay linked second:

The combined F.R. credit creation of QE I and II exceeds one trillion dollars. There is no way underneath the Sun to come up with unencumbered collateral of that magnitude to make this miraculous money proliferation legal.


http://www.professorfekete.com/articles%5CAEFImpeachBernanke.pdf

And a follow up essay to the above letter.

http://www.professorfekete.com/articles%5CAEFJunoMoneta.pdf

Now, he does put the term "disaster" in scare quotes. However, he says that all of these rescue programs are based on sticking the taxpayer with the bill so that private investors never take losses, and you yourself have said--and his entire article indicates--that he wants to _challenge_ if not encourage us to _abandon_ that principle.

Right, and that entails challenging finance capitalism; concretely, in entails a restoration of the old New Deal-era fetters on the financial sector. (This, incidentally, is the recommendation of another conservative finance expert (NY Post and City Journal columnist), Nicole Gelinas in After the Fall.)

So what Francis is being a touch evasive about (because he knows what fury it will bring down upon him if states directly, which fury I have some experience as well) is that he thinks sound banking requires us to abandon the Right-wing critique of New Deal regulation, at least insofar as it applies to the financial sector. Deregulation of finance was a major and potentially fatal mistake.

So what Francis is being a touch evasive about

But recommending a bunch of mortgage defaults--even a special federal law specifically to encourage such defaults throughout the country--and being willing simply to take the fall for that sounds like something quite different. It sounds like challenging the bailout principle at the end-point, at the point where we're actually willing to let the chips fall, not simply putting in additional regulations to make it, we hope, not "necessary" for the federal govt. to come in and bail everyone out. In fact, throughout the entire article, including in his reference to Paulson as "trying to do the right thing," this sounds like something C.F. is saying--we have to be willing to bite the bullet and not bail everyone out like this over and over. Simply returning to some older form of regulation _while leaving the TBTF principle in place, in fact while positively affirming the entire TBTF principle_ just doesn't sound like what he's advocating at all.

Heck, he even characterizes it as "unfortunate" that "no one wants to take the risk of total systemic collapse" entailed by mortgage defaults _apparently_ without further bank bailout.

I need to stop trying to speak for Francis. I'm bound to misrepresent him.

For myself, I would say that the post-New Deal regulatory regime is TBTF. That principle is the legacy of the Reagan-Bush-Clinton-Bush regulatory approach to high finance. Its issue is the structure of socialized risk/private profits we have today.

Okay, Paul, so if you could put, say, Glass-Steagall back in place, _then_ would you advocate a stop to future bailouts?

(By the way, Paul, I never recall being or appearing "furious" over your apparent advocacy of a reinstatement of Glass-Steagall, to which you're apparently referring, here. I'm not even sure I have a position on that specific subject, never having studied it carefully enough to develop one. Nor do I recall any commentator here at W4 who has been "furious" with you for having, specifically, advocated a return to G.S. But perhaps your experiences of dramatic conservative fury over this highly specific policy position are things that have happened elsewhere.)

Paul,

Not sure if you saw this article by Peter Wallison published at AEI in the fall of 2009 regarding Glass-Steagall (G-S). In it he states that what was repealed in 1999 were the provisions of G-S that prevented commercial banks from being affiliated with investment banks. Whereas the provisions of G-S which prohibited commercial banks from engaging in securities underwriting and dealing and prohibited investment banks from having the same access to cheap funding as commercial banks, were left in place. G-S never prevented commercial banks from taking on investments as banks do, they were only prevented from engaging in the underwriting and dealing of securities. In other words, Wallison argues that these giant banks got into trouble by making a lot of bad investments which is an activity that G-S never sought to regulate. Hence, re-instating the two provisions of G-S which were repealed likely won't make any difference.

http://www.aei.org/outlook/100089

Lydia, not being fully versed on the genesis of Glass-Steagall and its revision, I can't speak directly to that last question. But I do think the basic intuition that commercial banks should be heavily regulated and kept separate from "underwriting and dealing of securities," is sound and ought to be re-established in law. My other prescription is using the force of law to push investment banks back into private partnerships.

Granted those two reforms -- (1) that securities trading cannot be linked to commercial, that is, insured, banking; and (2) that investment banking must be returned to the old game of private partners' testing their money in the securities trade -- and I think great strides could be made. But I don't think it would be accomplished without extraordinarily shrill and sustained cries from the apologists for finance. The banking lobby's reaction to some of Volcker's proprietary trading rules was evidence enough (in my judgment) of the corruption that confuses "free enterprise" with "usurious banking."

I don't have a strong opinion on the subject of such regulation as the Volcker trading rules, as I said, Paul, but I must say that when I do a bit of googling and come up with an op-ed like this

http://cei.org/op-eds-articles/repeal-dodd-frank%E2%80%99s-senseless-volcker-rule

I have a hard time either a) calling it "shrill and sustained cries" or "fury" or b) saying that the person making the argument is "confusing free enterprise with usurious banking."

To me it just reads like a difference of opinion regarding what is riskier than what, what caused the crash in '08, etc. It doesn't sound like some sort of ideological shrillness based on irrational a priori commitment but just like disagreement about facts and probabilities.

In any event, I'm not quite sure whether or not "great strides could be made" means, "Yes, then I would oppose future bailouts." If it doesn't mean that, I find it a bit hard to wrap my brain around the identification of TBTF with "the other guys." It seems to me as though it's anybody who is committed to bailouts for the indefinite future who is really committed to TBTF, whatever other regulations may be proposed.

It has, to my ear, a bit of the same ring as the government taking over health care and then trying to control costs artificially by top-down cost caps which do not work, for the same reason that the Philosopher's Stone has never been discovered. In this banking situation, the government lets it be understood that it won't let these big guys fail, that it will bail them out, and then that is used as an argument for trying to minimize risk by regulation.

"To me it just reads like a difference of opinion regarding what is riskier than what..."

The article states.

"But policymakers must recognize that every time a financial institution engages in an economic transaction — whether a loan or a trade — it is making a “gamble” that it will never get its money back. Limiting a bank’s ability to take equity in a firm by saying it can lend but not invest to that particular firm will result in less, not more, protection from risk."

Which is to say bonds are of an identical risk with day trading. This, besides being profoundly stupid , is pure, shrill ideology.

While I'm not sure of the string you used, it is interesting that you picked that one out of what must have been many.

The problem with proprietary trading by corporations is that they are gambling with other folks money - the shareholder's. Clients can sue and partners can be ruined. If the trades win the traders and executives get outsize compensation on a yearly mark to market basis. If they lose, the most they lose is a job and rarely that. That the article Lydia referenced notes that the traders are going to the hedge funds is a good thing and an indication of the casino-like nature of much of current finance.

Oh, and "trading" isn't "investing", it's trading.

On to the FC article. The first question to ask when one is confronted with a comparison is to ask why this and that as opposed to this and something else?

Over the past few decades we have seen many nations beset with this or that financial crisis. Japan, SE Asia, Sweden, Russia, Argentina, Mexico, Canada, the Baltics, Ireland, Iceland, etc. Why Greece? Beats me and FC doesn't really
explain.

Anyway two items:

1. You all should google "zombie lie". When one is reading something and one comes across one of these it is a pretty good indication that one isn't going to learn much except not to rely on the author.

A person who believes that CRA and F&F were causes of the meltdown has bought into such a zombie lie (unless, of course, he knows better and is engaging in ideological or partisan hackery).

2. This is one of the most lame brained suggestions I've seen,

"One of the thought-experiments I’ve been running is: what if Congress passed a law to allow American homeowners to simply default on their mortgages with no questions asked? You’d lose all the equity in your house and your other assets, but you wouldn’t lose your job, and you wouldn’t lose your ability to go into a rental. And your bank would take the loss."

For the most part folks can do that now but why would you want to do anything to encourage it? If we want banks to be disciplined simply pass legislation allowing a "cramdown" through the bankruptcy laws.

I've seen a lot of talk of mortgage strike and suchlike on the Left lately. I believe even Roger Lowenstein got in the act. Is it your view, Al, that these are "lame-brained" as well?

Without specifics, probably. We have far too much debt on private balance sheets; we don't need gimmicks and meshuggah stunts. Foreclosures, past a certain point, cost communities money and play havoc with property values and quality of life. We need to resolve the foreclosure overhand in a systematic manner.

I understand and take RL's point. His point seems to be that the threat of a large number of walk aways would force the banks to deal with homeowners the same way they deal with businesses. As I understand FC's plan we would have chaos. RL wants to force the banks to act by individual action as I would by changing the law; FC wants to destroy the system. I (and RL) want to fix it. I still hold that we need to give bankruptcy judges the ability to deal with mortgages on primary residences as they do with other debts.

We are already half way through what is beginning to look like a lost decade (or more). What does Greece have to do with anything. It's been a while since you remarked on how Europe seemingly rejected Keynes - how's that working out? How's the UK doing with that austerity? Would you rather be Irish or an Icelander?

Paul you mentioned that you rely on two; I would remind you that in multitude of counselors there is safety.

So Cella and Cianfrocca are the radicals and Al the conservative. This is a very interesting development.

We're a debt-sick society, above all mortgage debt. The older term for what we're talking about here is a jubilee. Or maybe we need to revise and update W. J. Bryan's cross of gold polemics.

But wait: private creditors never take losses. It's not a principle I expected Al to be defending.

The older term for what we're talking about here is a jubilee.

Well, no, because the lender would get the house. That's about the only thing that gives the idea any sense to it at all, from my perspective. "Asset-recourse debt," I believe was Zippy's term. So the bank would have recourse to the asset. Well and good. But not simply canceling all the debts per se.

Well, no, because the lender would get the house.

Only so long as the lender could be proven.

Lowenstein's mortgage strike idea is purposed toward forcing cramdowns; it's a negotiating gambit in the manner of a business considering a strategic default. Francis's idea (mentioned only in passing) is more vague, but can be seen easily enough as a concession toward Lowenstein's position.

Both share a strong skepticism that all these private creditors in various exotic debt markets ought to be protected from losses, so they are grappling for a way to permit those losses without triggering a new crisis.

But wait: private creditors never take losses. It's not a principle I expected Al to be defending."

And I'm not but we do have the matter of then and now. As you have admitted, we would need a Congress with a majority of Sherrod Brown-like actors to pass truly effective financial reform legislation. Having a truly serious discussion on TBTF and bailouts with folks who will never vote for legislators who are not tools of the financial industry and who, for the most part, are committed to an ideology that is incapable of devising an effective solution to the problem of a rapacious financial sector is sort of pointless. If you don't want creditors to be protected don't elect their protectors regardless of those protectors views on certain botique issues.There are no solutions to the problems of the financial sector on the right that don't guarantee misery.

Meanwhile we have current fish to fry; unemployment is too high and the recovery is too slow. Down south of here you had a post on Europe abandoning Keynesian economics. So did we. How has that worked out for the UK, the PIGS, and the US? here are a couple of more useful articles,

http://economistsview.typepad.com/economistsview/2011/06/fiscal-policy-in-developing-countries-escape-from-procyclicality.html#comments

and

http://www.washingtonpost.com/business/economy/five-economic-lessons-from-sweden-the-rock-star-of-the-recovery/2011/06/21/AGyuJ3iH_story.html?wprss=rss_business

Having a truly serious discussion on TBTF and bailouts with folks who will never vote for legislators who are not tools of the financial industry and who, for the most part, are committed to an ideology that is incapable of devising an effective solution to the problem of a rapacious financial sector is sort of pointless.

You've admitted in the past, with admirable directness, that you don't come here for serious discussions. So I am at a loss as to what to make of the above statement. Have you renounced "idle curiosity" in favor of the arts of persuasion?

Observe. You have some instinct or intuition or experience that inclines you to dislike usury. What you don't have is a reasonable ground for saying that a man ought not commit usury. In fact, you don't even have a reasonable ground for saying that the question of usury's justice, the "ought" of usury, is a meaningful question, because you have no reasonable ground for saying that any question of "ought" is a meaningful question. In another thread you made a rather idle appeal to authority, combined with some cut-rate legal positivism; but of course even a bunch of reactionaries like us is somewhat suspicious of a straight appeal to authority so nebulous that is fails to actually name the authority; and even more suspicious if the Unknown Authority turns out, on inspection, to be nothing more substantial than current positive law.

What was that about a serious discussion?

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