The Economist On Narrow Banks

The Economists Free Exchange weblog covers narrow banks, as well as parts of my "run free" paper inwards a shipping somewhat mean-spiritedly -- or possibly unintentionally self-descriptively --  titled "Narrow Minded." I e'er appreciate publicity, but a few parts appear incorrect plenty to address.

After nicely roofing the history of the idea, the Economist writes,

such a invention raises huge practical questions. The starting fourth dimension is implementation: how to larn from today’s organisation of highly indebted banks to ane inwards which they are financed chiefly yesteryear equity. 

That's non hard. We're like shooting fish in a barrel raising majuscule requirements, as well as all nosotros receive got to exercise is to piece of work along raising them. My Pigouvian taxation on debt would aid a lot -- I recall banks screaming how difficult it is to number equity or how terrible non to pay dividends for a piece would all of a precipitous abide by it much easier if paying five cents for each dollar of debt issued. Announcing that institutions higher upwardly 50% equity as well as amongst less than 20% short-term debt are exempt from Basel as well as Dodd-Frank property rule mightiness crusade a rush for the exits.

Politically, at that topographic point would endure formidable opposition from vested interests. 

And this is, somehow, an declaration against the invention rather than for it? There is formidable opposition from vested interests against abolishing agricultural subsidies, merchandise protection, occupational licensing, as well as taxicab monopolies. Dear Economist, when did feeding the cronies larn an declaration for keeping bad policy inwards place, non a main indicator of needed change?

Economically, the transition would require banks to dispose of a vast stock of loans, or enhance an equivalent total of long-term debt as well as equity.

The starting fourth dimension is exactly untrue, as well as the minute is deeply misleading. For every dollar of long term debt or equity that must endure raised, ane dollar of brusk term debt is paid back. No extra funds from investors are required, as well as no selling of assets is required. It's exactly a Modigliani-Miller / Yogi Berra reslicing of the same pizza.

H5N1 minute business organisation is whether a split betwixt narrow banks as well as wider lending-and-investment firms would really eliminate runs. If other institutions supercede banks inwards making loans, they could goal upwardly creating fragilities of their own. Mutual funds, for example, are financed yesteryear shareholders, non creditors; but if such shares are seen equally stable as well as safe, investors volition process them equally deposits—and endeavor to withdraw their investment if that security is threatened.

This is exactly just wrong, as well as inwards the "Economist should know better" camp. You cannot "withdraw your investment" from a floating-value  fund.  The fund makes no fixed-value promises. It cannot fail. It cannot endure a run. Look upwardly the Definition of run, beloved Economist! H5N1 floating-value fund, as well as particularly an exchange-traded fund amongst no one-day NAV promise,  is the paradigmatic trial of a run-proof institution.

Yes, investors tin all endeavor to dump stocks, either held straight or held through funds, as well as stock prices tin piece of work down. There is no failure, no bankruptcy, as well as no crisis inwards this. We desire a organisation that allows booms as well as busts without crises, non the hope that wise regulators volition stride inwards to stabilize stock prices!

After this happened fifty-fifty once, people would exactly flock to the narrow banks, as well as at that topographic point would endure no beginning of lending.” To forestall this, the authors argue, governments would receive got to intervene to relieve the “not-so-narrow intermediaries”.

Now we're deep into the empty-headed season. The intermediaries exercise non ask whatever saving. They receive got non made whatever promises. H5N1 floating value fund cannot piece of work bankrupt! Yes, stock prices tin fall, as well as your burn sale is my buying opportunity. Do nosotros really desire Governments as well as their fundamental banks buying stocks to prop upwardly their values? Do nosotros really desire governments allocating credit? Have nosotros as well as thence lost sight of what a "crisis" is, as well as is not?

Third, such a organisation would nevertheless ask plenty of regulation.

The fact that nosotros ask unopen to rule -- that I don't attain a libertarian-anarchist nirvana solution inwards which absolutely aught rule is required -- is somehow a defense strength of the electrical flow monstrous setup? I recall nosotros ask cops at stoplights. Is this a defense strength of Dodd-Frank? Come now, it takes most 1/10th the regulation, because nosotros tin throw out all rule of the security of banking company asssets, all the run a jeopardy weights, all the stress tests, all the "resolution," as well as and thence on. The perfect is genuinely the enemy of the expert at the Economist.

But given the growing cost as well as inefficiency of today’s regulatory regime, the concept of narrow banking for sure deserves to a greater extent than serious consideration.

I'll accept the grudging endorsement as well as furnish a grudging gratitude for the cry of the idea!