Author Topic: Too Big to Fail?  (Read 4188 times)

Shane

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Too Big to Fail?
« on: December 20, 2015, 03:10:19 PM »
Just finished listening to a podcast of Russ Roberts' interview with George Selgin of the Cato Institute on Ben Bernanke and the Fed's handling of the 2007 economic crisis in which they discuss the moral hazard created when a federal bank steps in and bails out insolvent investment firms and banks.

In the interview Roberts and Selgin discuss Walter Bagehot and his late 19th Century writings on economics, specifically Bagehot's Dictum which states that central banks should lend freely to solvent banks which are experiencing liquidity challenges, but that the lending should be done at a sufficiently high rate of interest as to deter banks that don't really need the help from applying for loans.

Both Roberts and Selgin seem to agree that, although things pretty much turned out alright in the end of the recent Great Recession, i.e., the Fed didn't end up losing any money and they averted a global financial meltdown, the long term moral hazard created when the Fed stepped in and bailed out firms which had made poor choices and taken inordinate risks may someday come back to haunt us.

Now that the Fed has, once again, stepped in and declared certain institutions, "too big to fail," people in the financial industry have the renewed expectation that their firms will also be rescued by the Fed if they make poor investment choices, thus encouraging firms to take even greater risks in the future. The fear is that, eventually, banks' collective belief in the power of the Fed to step in and fix problems will create a financial crisis that the Fed won't be able to easily solve.

Anyway, just wanted to share this podcast and econtalk.org, in general, in case any of you who are interested in economics haven't heard of it before. Econtalk.org has hundreds of podcasts on various subjects archived at their website which is searchable. If you're into that kind of thing, check it out. You might find some topics you'd like to learn more about.

marty998

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Re: Too Big to Fail?
« Reply #1 on: December 20, 2015, 10:12:35 PM »
Bernanke has been on the speaking circuit pontificating about 2007.


I heard him speak at an event in Sydney back in May. He talked quite a bit about moral hazard and the precedents that various bail outs would set.


AIG got help because it did in fact have profitable bits and pieces that could be used as collateral for the bailout loans.


Bear Sterns had nothing left so the Fed couldn't lend to it and it was left to fail. Bernanke did try to flog it to Citi and Barclays on the weekend before - both parties conducted due diligence and walked away.

Shane

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Re: Too Big to Fail?
« Reply #2 on: December 21, 2015, 12:24:20 PM »
Generally, I think the democratizing effect of the Internet has been a good thing. It wasn't that long ago if you wanted to sell your car or bicycle or whatever, you had to pay to put an ad in a newspaper and wait days just for the ad to be published. Now I can just post on CL, and sometimes within just a few hours the item is already sold. This seems like an awesome development to me. I had to look up "blockchains" to see what they were as I'd never heard that term before. I don't have any experience with Bitcoin. Have you ever used it? P2P lending sites like Prosper and Lending Club seem to be another threat to traditional banks. Do you think bank executives have a plan in place to keep themselves and their businesses viable in the event that money were to become completely decoupled from banks sometime in the future?

nobodyspecial

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Re: Too Big to Fail?
« Reply #3 on: December 21, 2015, 10:20:48 PM »
Do you think bank executives have a plan in place to keep themselves and their businesses viable in the event that money were to become completely decoupled from banks sometime in the future?
Yes, they will pay lobbyists to persuade politicians that any alternative be made illegal

PizzaSteve

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Re: Too Big to Fail?
« Reply #4 on: December 23, 2015, 09:27:40 AM »
Agree in politics competing with technology.

It is a natural outcome though, as society struggles to sustain institutions, keep the fragile web of trust together, innovate to deliver cool new stuff, and regulate the innovation so we don't kill people or suddenly have nothing to do.

Mustachianism is a good force, because it teaches resilience and self reliance.

Most people are not futurists, in the sense that they are not anticipating the inevitable technology changes and therefor preparing.  They react.  This includes, surprisingly, most CEOs.  I find it frustrating that throughout my career the future has seemed so obvious, but few executives I tried to advise would prepare.  Outside of the occasional Bill Gates or Steve Jobs, most will try to put up human barriers (aka politics) to try to maintain stability.  People like stability.

So we want a stable fed/traditional banking system because it has served us reasonable well for a few hundred years.  Money = trust, so you must have a trusted intermediary to set the coin.  We have learned this since money was invented.  The threat to the trust comes from fear, fraud, or fundamentals.  Fear is a mass psychology issue, fundamentals are true economic factors (like a country printing too much money for its economy to absorb), fraud a technology one.

Bitcoin is just one of many examples of an alternative currency.  The notion of a block chain and block chain intermediaries is being considered by many serious financial players.  The key issue is not the actual currency (any currency can be exchanged at a rate), it is more about what technology will we use to facilitate fraud free ownership transfers.  Fraud is a huge global currency issue and the industry is using various technologies in an attempt to create a fraud free currency world.  Most of these rely on encryption and they actually track the history of the money in the money itself.  This gives and audit trail and fraud resilience.  Issues such as quality printing for cheap have made paper money worrisome.  Issues such as computer hacking have made banking systems worrisome.

That said, most are not even thinking about how traceability in money is itself a social issue.  The fact that we all now use credit cards as our 'real money' and that means all our purchases are now effectively public information.  This has all sorts of implications.

Anyway, back to the main issue.  How do we maintain a world of trust and trade in an increasingly information driven world?  The craigslist example is an excellent one.  It speaks directly to several of my conclusions.  First it is a free service.  Second it is a better service. Third, it facilitates direct exchange often without the financial intermediaries (in some case money is not part of the trade process).  Hence my comments above.  Consumers are growing the economy without the traditional economic measurement systems being able to track this commerce.  Growth without growth to the stock market.   I see this as the threat to index investing in global equities, but also a hope for the future, in that people can have good lives, do important meaningful work, enjoy, and yet live in a world with very low corporate profits and investment returns.  It will be hard for politicians to accept this, but our economic measures will not apply very well.  The tools of the fed and the banking system will be blunt and difficult to apply with precision.
« Last Edit: December 23, 2015, 09:30:26 AM by PizzaSteve »