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Banks
BANKS....Justin Fox on the "shadow banking system":
And another thing: If you borrow short and lend long, you're effectively a bank. It's becoming ever less clear to me what justification there is for nonbank borrow-short-lend-long-institutions other than regulatory arbitrage.
Brad DeLong responds:
Not just "effectively" a bank. You are a bank. Not until the twentieth century did we have organizations that borrowed short and invested long that did not call themselves "banks." The emergence of non-bank banks has always been the result of attempts at regulatory arbitrage.
So what's the answer? What should our 21st century definition of "bank" be for regulatory purposes? Any entity that invests other people's money in any way? That can't be right, can it? Or can it?
We need to stop being wimps and being afraid of the loonies. The market doesn't work. Nationalize the banks. Don't insure institutions that aren't nationalized.
And Kevin, the site layout still sucks and loads horribly.
"Any entity that invests other people's money in any way" sure is a bank
it takes money from people, deposits, and invest in things that pay higher returns in the long run. it pays people a premium for their money, part of the returns sorta like interests on deposits, and keeps some of the returns for themselves.
hedge, funds, mutual funds, etc. they're all banks really
they call themselves different to escape regulation
Maybe if it fits this rule of thumb:
Mr. Dawes Sr, Mr. Banks and Bankers:
If you invest your tuppence
Wisely in the bank
Safe and sound
Soon that tuppence,
Safely invested in the bank,
Will compound
And you'll achieve that sense of conquest
As your affluence expands
In the hands of the directors
Who invest as propriety demands
You see, Michael, you'll be part of
Railways through Africa
Dams across the Nile
Fleets of ocean greyhounds
Majestic, self-amortizing canals
Plantations of ripening tea
All from tuppence, prudently
Fruitfully, frugally invested
In the, to be specific,
In the Dawes, Tomes
Mousely, Grubbs
Fidelity Fiduciary Bank!
Now, Michael,
When you deposit tuppence in a bank account
Soon you'll see
That it blooms into credit of a generous amount
Semiannually
And you'll achieve that sense of stature
As your influence expands
To the high financial strata
That established credit now commands
You can purchase first and second trust deeds
Think of the foreclosures!
Bonds! Chattels! Dividends! Shares!
Bankruptcies! Debtor sales!
Opportunities!
All manner of private enterprise!
Shipyards! The mercantile!
Collieries! Tanneries!
Incorporations! Amalgamations! Banks!
You see, Michael
Tuppence, patiently, cautiously trustingly invested
In the, to be specific,
In the Dawes, Tomes
Mousely, Grubbs
Fidelity Fiduciary Bank!
I don't particularly care what they call, them. However, I'd lke to see two general rules in place:
1. If there are financial entities whose size and activities can have large-scale adverse impacts on the well-being of the society as a whole, then society has a legitimate interest in regulating those entities.
2. Any private entity which is "too big to fail" is also too big to exist, and should be broken up. (Failure to follow this rule simply invites the overlarge entity to blackmail the rest of us.)
Some companies call that a retirement fund.
:)
I don't think that "borrow short lend long" quite captures it. A very conservative mutual fund might have some liquidity lines, but nobody would consider it a bank.
The magic word is "leverage." Any firm with predominantly financial assets (i.e., others' promises to pay) and high leverage should be subject to prudential regulation. This includes:
-Banks
-Insurers, who are already subject to their own form of prudential regulation.
-Securities houses
-Hedge funds
-AmEx, GECC, GMAC, etc.
It does not include the entire financial sector. Unleveraged VC firms, for example, do not need prudential regulation. There are other kinds of regulation that might be appropriate for such firms. The credit card clearinghouses and the credit reporting agencies could each use (more) consumer regulation; rating agencies might need another regulatory regime, etc. But we're not worried about these guys' balance sheets or leverage.
A little off subject, but does anyone know how the Hawala system is doing these days? Who knows? maybe that's the future of banking. The only thing they had going against them before was a lack of regulation. But it turns out the regulation of traditional banks wasn't enough to create anything like stability or security. So why shouldn't we use the Hawala system now?
Is it really that hard to recognize that nothing has changed since the last millennium except our ability to engage in denial?
A bank, by any other name is a bank. It wasn't, isn't and will not be, about defining the term bank. It was, is, and will always be about avoiding being regulated.
Seriously; Duh!
The traditional definition of a bank is an institution that takes deposits (particularly "checkable" deposits) and also makes loans. Many organizations do one or the other but few do both. Banks are also subject to the Federal Reserve's Regulations (A through DD, last I looked). Other organizations are not. I'm just sayin'....
I think Joe S is on the right track. I would say strict, conservative capital ratios should apply to all financial institutions. The shorter term their liabilites, the higher their capital should be. As for investment banks, the big ones no longer exist. Goldman Sachs and Morgan are becoming bank holding cos., so they will be regulated as such.
One intriguing proposal is to raise capital ratios when financial markets appear to be getting overheated as a counter-cyclical move. This would require them to deleverage before things get out of hand.
Of course, this makes too much sense, so it will never be adopted.
Kevin asks:
What should our 21st century definition of "bank" be for regulatory purposes?
This may not be the right question. Why play with word definitions? Better to ask:
What activities a financial institution engages in should make it subject to regulation?
("Bank" is a very broad term now. There are commercial banks, investment banks, savings banks, many others. And of course also blood banks and sperm banks... Leave the word alone.)
DeLong's answer was empirically wrong. Banks has long meant deposit taking institution, and certainly there were things like investment trusts before the 20th century that did not call themselves banks, but borrowed short, and lent long. Regulatory arbitrage did not produce, in and of itself (sadly DeLong sounds like some anti regulatory people who attribute any given development they do not like, post facto, to regulation).
A bank as per regulation is not the core problem. Rather it is having proper gatekeeping between the main financial system, largely financed in healthy economies by domestic savings (of course the US is an exception, here, but then, your credit economy like the UK's, has been unhealthy for a bit, for the US since the 1980s as I recall the savings rate), and the economy financed by institutional investors solely. And also have proper oversight on the 'exotics' - to the extent they feed back into the main financial system. Had your man Greenspan allowed proper development of oversight of say Credit Default Swaps with a view to controlling and limiting to reasonable levels cross exposure, and exposing naked regulatory gaming, this crisis would be like your 1987 crash. Scary, but ultimately not that impactful.
One thing's for sure, we'd better make our definitions, for regulatory purposes, much tighter than they've become over the past several decades of Republican rule.
Did NOBODY read Jerry's shit? Holy hell man, I'd smoke a bowl of dirt with you.
Once when I worked as a Sherpa, touring the Blue Ridge Parkway as a bicycle leader, I overheard a rich client reference the crash of 87. At the time it struck me as the funniest thing I've ever heard: the way he dropped the word crash and the year. He was by far the cockiest rider, a 6,000 Trek and one to match for his wife who ended up riding in the van most of the time for want of physical fitness. He pushed on, winning stages and conquering the mountain ridge. In his lispy Spanishy English he would pull into the rest stops and demand "more bars, more bars" and would consume any and every energy bar within reach. Yes, it was 07 now, 20 long years after the crash, and he was completing 1/19 of the Tour de France at 1/4 speed at the low cost of $3,000 a person and he needed fuel for the muscles and the glands.
He and Kathy grew more and more tense. In the van she would explin that they had more than enough and were happy people, two daughters and a comfortable life. He would push to be in the pack of leaders every day, at every moment, verbally commentating as he went: updates, feelings, needs. Oh, he pushed and he kept it inside. He wanted to stay with the lead dogs, but we were too strong. I remember the moment he broke. Its the section of the Blue Ridge that runs from Hwy 80 to the Mt. Mitchell service road. Old, early east-coast switchbacks and steep climbs. A 13 mile stretch that forces you to climb 2000 feet, drop 2500, and clib back up 3500 if you want to see the highest point E of the Mississippi. He had on too many clothes, he was hot and panting, overheting and not aware that the hardest climb he was ever going to be on was followed by a 4 mile descent that led to the hardest climb he would ever be on. I kept an eye on him and at the right moment stepped up my cadence and pulled the heart strings of a guy from Texas riding a 10,000 Pinarello who was a cat5 racer. We started the push with about 200 yards to the first peak leaving Mr. '87 and two others. They stuck to our wheels, he did not. The four of us hit the top in full stride and fell into the 4 mile wave at about 46mph.
We had to send the van back out later that evening to look for him. It was getting dark and he had long since bonked.
The next morning at breakfast he was suited up and silent. Kathy was doing her best PTA smile. It had prolly been a long night for her.
Later that week I was paid $350 for a 80+ hour work week that included physical labour, customer service, and mechanical services. I had to chase the guy who ran the company down to get my money. He told me to piss off and I'm sure called the next on his list to Sherpa about with. I'm sure that happend to people like myself all summer. It was like the crash of 07 for me. I would not be able to make a living in NC as a bicycle Sherpa. Damn.
I sent a letter to the BBB of Asheville and attached Aesop's fable about a sheep in wolves clothing. Never heard a word back from them.
But today, as I sit and watch 5,000 years of economic thought spiral down the shitter and hear the collective sigh of relief from the 4billion impovrished people on this planet, the "good riddance" collective, if you will, I can't help but laugh and wonder what the hell that competative, delusional man was talking about when he quietly asked over butter rolls and A1/Ranch sauce if we could recall the crash of 87. Then he told us that he had gotten very lucky working in London at the time. It was the next day that we dropped him into the lonely void that cyclist call "off the back."
Are these bankers really ready for dogs to eat dogs?
to g powell: What is happening (or will be happening) to small investment banks?
I thought the meaning of "bank" was, in modern terms: an entity that can lend money, at interest, and can have the debt monetized by a system of currency administration. So, me just lending some cash under a contract to a friend, even if the arrangements for repayment are like that of a bank - I'm not a bank since the Fed doesn't monetize my debt - true?
tyrannogenius
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Not every project is award winning, if it solves the problem for the client it was successful.