John Weatherall Public Lecture | Martin Wolf
http://youtu.be/1w-pODAjVyE
[1hr28mins]
Hat tip to Macrobusiness.com.au
Interest on Reserves, Settlement, and the Effectiveness of Monetary Policy
Joshua R. Hendrickson suggests that paying interest on excess reserves at the Fed reduces the effectiveness of monetary policy. Money paid to purchase Treasuries finds its way back to the Fed in the form of excess reserves. Here is the abstract from his paper:
Over the last several years, the Federal Reserve has conducted a series of large scale asset purchases. The effectiveness of these purchases is dependent on the monetary transmission mechanism. Federal Reserve chairman Ben Bernanke has argued that large scale assets purchase are effective because they induce portfolio reallocations that ultimately lead to changes in economic activity. Despite these claims, a large fraction of the expansion of the monetary base is held as excess reserves by commercial banks. Concurrent with the large scale asset purchases, the Federal Reserve began paying interest on reserves and enacted changes in its Payment System Risk policy that have effectively made reserves and interest-bearing assets perfect substitutes. This paper demonstrates that these policy changes have had statistically and economically significant effects on the demand for reserves and simply that the effectiveness of conventional monetary policy has been significantly weakened.
Read the entire paper at Interest on Reserves, Settlement, and the Effectiveness of Monetary Policy |
Joshua R. Hendrickson.
Emperors of Banking Have No Clothes | Bloomberg
The too-big-to-fail problem for banks is greater today than it was in 2008. Since then, the largest U.S. banks have become much larger. On March 31, 2012, the debt of JPMorgan Chase was valued at $2.13 trillion and that of Bank of America Corp. at $1.95 trillion, more than three times the debt of Lehman Brothers Holdings Inc. The debt of the five largest U.S. banks totals about $8 trillion. These figures would be even larger under European accounting rules.
By Anat Admati & Martin Hellwig
Read more at Emperors of Banking Have No Clothes – Bloomberg.
APRA: Australian banking system ‘more sound’
Interesting choice of words:
[Australian Prudential Regulation Authority chairman John Laker] said the Australian banking system was more sound than it was five or six years ago.
“We know that because we managed to negotiate the financial crisis without the fallout for our financial systems,” he said.
“The banking sector is holding more capital, it’s holding higher quality capital, it is holding more liquid assets.”
What he did not say is that Australian banks are financially sound and holding enough capital — and we are unlikely to hear that before banks double their current “improved” capital and leverage ratios.
Read more at Housing bubble worries 'alarmist': RBA | Business Spectator.
Higher Bank Capital Requirements are Necessary but not Sufficient to Prevent the Next Crisis | naked capitalism
Bill Black explains why higher capital requirements for banks is only part of the solution. Capital is simply an accounting measure of Assets minus Liabilities and bankers are not above gaming this to their advantage.
….There were hundreds of Office of Thrift Supervision examiners whose opinions repeatedly proved vastly superior to the economists’ predictions during the S&L debacle. Akerlof and Romer concluded their 1993 article with these sentences in order to emphasize this message to their peers.
The S&L crisis, however, was also caused by misunderstanding. Neither the public nor economists foresaw that the [deregulation] of the 1980s were bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself. (Akerlof and Romer 1993: 60)
Larry and Janet: please listen to the regulators in the field. Please end Ben Bernanke’s practice of placing economists in charge of Fed supervision. The Fed’s economists are a major source of the Fed’s problems….. the solution needs to come from the people in the field. That is particularly true with regard to detecting systemic risks.
Read more at Bill Black: Higher Bank Capital Requirements are Necessary but not Sufficient to Prevent the Next Crisis « naked capitalism.
Vickers calls for doubling of bank capital levels | FT.com
“It is not very sensible to run a market economy on the basis of a banking system that is 33 times leveraged, let alone 40 or 50 times leveraged,” Sir John [Sir John Vickers, Oxford academic who chaired the Independent Commission on Banking] told the Financial Times. He believes the right number is closer to 10 times, equivalent to a 10 per cent ratio.
That is a lot higher than the 3 per cent (33 times leverage) required by Basel III and the 4.1% (CBA) to 4.5% (WBC) of the big four Australian banks.
Read more at Vickers calls for doubling of bank capital levels – FT.com.
Fed’s Fisher Slams Congress Over Fiscal Policy | WSJ
Rob Curran at WSJ reports on a speech by Dallas Fed President Richard Fisher:
Speaking at a luncheon hosted by financial-industry trade group the Dallas Estate Planning Council at the Dallas Country Club, Mr. Fisher said the central bank has done all it can to stimulate the U.S. economy. He said members of Congress–both Republicans and Democrats–have failed to do their part. Elected officials have “sold our children–and our grandchildren–down the river,” Mr. Fisher said. “We haven’t had a budget for five years; no one knows what their taxes are going to be; no one knows what spending is going to be.”
The Dallas Fed president has long maintained that the missing ingredient in the economic recovery is a sound fiscal policy.
via Fed’s Fisher Slams Congress Over Fiscal Policy – Real Time Economics – WSJ.
John Mauldin: Effect of the taper
The last two times the Fed has ended a period of quantitative easing, the air has come out of the market balloon. Has this coming move been so telegraphed that the reaction will be different than in the past, or will we see the same result? Want to bet your bonus on it? Or your retirement?
~ John Mauldin
See graph at Mauldin Economics
Bloated business of banking | The Australian
Adam Creighton discusses the likelihood of taxpayers being asked to bail out too-big-to-fail banks.
In Australia that probability is now 100 per cent. Standard & Poor’s, a ratings agency, gives Australia’s biggest four banks a AA rating explicitly because taxpayers will provide “extraordinary support” to their creditors in any crisis, an implicit guarantee worth more than one-quarter of the four’s annual profits.
Since 1995, the big four Australian banks’ assets, reflecting a global trend, have ballooned from 94 per cent of Australia’s national income to $2.86 trillion, or 190 per cent.
Read more at Bloated business of banking | The Australian.
Finally, Bank Regulators Have Had Enough | ProPublica
Jesse Eisinger observes US bank reactions to efforts to raise their minimum capital requirements. Many argue that the new rules will harm their competiveness.
Jamie Dimon, the chief executive of JPMorgan, raised the ominous specter that global rules are out of “harmonization” and that United States banks are now held to a higher standard.
“We have one part of the world at two times what the other part of the world is talking about,” he said. “And I don’t think there’s any industry out there that would be comfortable with something like that in a long run.”
To rebut that, I bring in a banking expert: Jamie Dimon. This side of Mr. Dimon’s mouth has repeatedly boasted about what a competitive advantage JPMorgan’s “fortress balance sheet” is, how the bank was a port in the 2008 storm…….
By raising capital standards and installing tougher derivatives rules, regulators are helping banks that are too foolish (or rather, the top executives who are too narrowly self-interested in increasing their own compensation in the short term) to recognize their own interests.
Increasing bank capital requirements would lower their perceived risk and decrease their cost of capital, giving them an advantage over international rivals with less stringent standards.
Read more at Finally, Bank Regulators Have Had Enough – ProPublica.