Wallison On Fiscal Regulation
Peter Wallison has an of import Op-Ed inwards the Wall Street Journal last week (AEI link) titled "Dodd-Frank too the Myth of Interconnectedness"
The chain of bankruptcies is i of the primal myths of the fiscal crisis. Influenza A virus subtype H5N1 owes coin to B, B owes coin to C, C owes coin to D. If Influenza A virus subtype H5N1 fails, it wil consequence in a chain of bankruptcies where B, C, too D neglect too.
As Peter points out, it only did non happen. We had a run, non a chain of bankruptcies.
A (L actually!) failed, investors noticed that B, C and D were invested inwards many of the same things, too stopped lending to B, C too D; B, C and D also stopped lending to each other. Everyone tried to purchase Treasuries. Since the banks were funding themselves past times overnight debt, they were supremely exposed to such a run.
Getting it incorrect matters. To create a sensible rule of the fiscal system, it helps to convey a vaguely coherent thought of what happened -- too what did non happen. The Dodd-Frank/Fed approach seems to live "we don't know what happened, really, so we'll precisely regulate everything that moves."
On the chain of bankruptcies theory, and every bit directed by Dodd-Frank, the Fed is getting fix to monitor too regulate all links betwixt "systemically important" institutions, too implement regulatory limits on their cross-exposures. I reviewed this inwards an before WSJ oped, too pointed out how fairly hopeless the endeavour is.
The primal thought of Dodd Frank, which the Fed is straightaway endorsing too implementing, comes downwards to this: no "large," "systemically important," "interconnected," or whatever (nobody knows what these words mean) volition live allowed to fail. The Fed volition live looking over their shoulders the whole time.
That approach will necessarily mean protecting them from competition. How else ambit y'all brand certain they're "strong," too volition never arrive trouble? And it's solely a affair of fourth dimension that "policy goals" larn enmeshed amongst "regulation." See concluding week's understanding whereby banks agreed to lower primary amounts on i grouping of homeowners, every bit "settlement" against their paperwork problems amongst around other completely unrelated group. The Fed is pushing difficult for banks to "do more" for housing... y'all tin run across where this volition become fast.
If, instead, nosotros had a run, every bit I too Peter believe, that sends y'all thinking inwards a completely contrary direction. In my view, it agency nosotros ask to larn rid of the institutional focus -- protecting specific "systemically important" institutions -- too instead focus on the run-prone assets. Peter seems to lean to a greater extent than to the "common shock" problem. But either work of thought is a long manner from what's going on inwards the dungeons of the Fed.
The chain of bankruptcies is i of the primal myths of the fiscal crisis. Influenza A virus subtype H5N1 owes coin to B, B owes coin to C, C owes coin to D. If Influenza A virus subtype H5N1 fails, it wil consequence in a chain of bankruptcies where B, C, too D neglect too.
As Peter points out, it only did non happen. We had a run, non a chain of bankruptcies.
A (L actually!) failed, investors noticed that B, C and D were invested inwards many of the same things, too stopped lending to B, C too D; B, C and D also stopped lending to each other. Everyone tried to purchase Treasuries. Since the banks were funding themselves past times overnight debt, they were supremely exposed to such a run.
Getting it incorrect matters. To create a sensible rule of the fiscal system, it helps to convey a vaguely coherent thought of what happened -- too what did non happen. The Dodd-Frank/Fed approach seems to live "we don't know what happened, really, so we'll precisely regulate everything that moves."
On the chain of bankruptcies theory, and every bit directed by Dodd-Frank, the Fed is getting fix to monitor too regulate all links betwixt "systemically important" institutions, too implement regulatory limits on their cross-exposures. I reviewed this inwards an before WSJ oped, too pointed out how fairly hopeless the endeavour is.
The primal thought of Dodd Frank, which the Fed is straightaway endorsing too implementing, comes downwards to this: no "large," "systemically important," "interconnected," or whatever (nobody knows what these words mean) volition live allowed to fail. The Fed volition live looking over their shoulders the whole time.
That approach will necessarily mean protecting them from competition. How else ambit y'all brand certain they're "strong," too volition never arrive trouble? And it's solely a affair of fourth dimension that "policy goals" larn enmeshed amongst "regulation." See concluding week's understanding whereby banks agreed to lower primary amounts on i grouping of homeowners, every bit "settlement" against their paperwork problems amongst around other completely unrelated group. The Fed is pushing difficult for banks to "do more" for housing... y'all tin run across where this volition become fast.
If, instead, nosotros had a run, every bit I too Peter believe, that sends y'all thinking inwards a completely contrary direction. In my view, it agency nosotros ask to larn rid of the institutional focus -- protecting specific "systemically important" institutions -- too instead focus on the run-prone assets. Peter seems to lean to a greater extent than to the "common shock" problem. But either work of thought is a long manner from what's going on inwards the dungeons of the Fed.
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