For example, you could use a notion of enterprise value, plus a margin type requirement for some types of derivatives. But I interpreted Fischer as saying that you should not impose massive costs on an economy i. Where does he get the confidence that he knows how that will unfold or that it will impose massive costs in even the medium term? This sounds like a formula for the bureaucrat with the big red button to push it whenever there is any pressure to do so.
Doing nothing, even if it might be the better course of action, has no branch in his decision tree. If you look at history and across countries, you find that recurrent financial crises are the norm, Liberty . - Various - Moral Hazard (CD), not the exception.
Not so long ago, the combination of limited entry, deposit insurance and deposit rate ceilings meant that a banking charter was a very valuable franchise. This led banks to internalize risk management because they wanted to preserve and increase the value of the franchise.
When we eliminated the deposit rate ceilings and opened up the lending industry to new and different entrants, we also turned valuable banking franchises into options, options whose value was maximized by levering up and taking huge risks. If the risks paid off, the banks made tons of money. If not, the FDIC would be left holding the bag. Credit booms and busts have always been with us and probably always will be. What we can and should do is i reduce the sizes of the booms and subsequent busts, and ii insulate, as far as possible, the rest of the economy from the credit market swings.
Milton Friedman made the case a half-century ago that funding private credit via deposits is a bad idea. In fact, Friedman long favored percent required reserves for depository institutions. In such a regime, panic in the credit markets does not affect the money supply and its effects on money demand can be offset by Liberty . - Various - Moral Hazard (CD) market operations. The percent reserves system also eliminates the need for deposit insurance, since the assets of depository institutions would always be highly liquid and extremely safe.
We should also seriously consider eliminating laws that favor debt financing over equity funding. Eliminating the corporate income tax and taxing all forms of income including capital gains, dividends and earned interest at the same rates would help a lot here. Too big to fail is also too big to be well-managed. As Arnold has often pointed out, the top management at Fannie and Freddie seem not to have known how much risk their firms were taking on, and the lobbying power that big firms have invites all kinds of mischief.
In a new video for Prager University, Nicole Gelinas of the Manhattan Institute succinctly and effectively provides very valuable information to help answer these questions. Particularly if you want to understand how the government promoted bad behavior by banks and created the conditions for a crisis. These policies helped to create the bubble, and many financial institutions became insolvent when that bubble burst.
The purpose of TARP was to bail out big financial institutions, which also meant protecting big investors who bought bonds from those institutions. And while TARP did mitigate the panic, it also rewarded bad choices by those big players. In short, instead of bailing out shareholders and bondholders, it would have been better to bail out depositors and wind down the insolvent institutions.
Bailouts, however, screw up this incentive structure by allowing private profits while simultaneously socializing the losses. Assuming your IQ is at least room temperature, you would say no. But our federal government, when dealing with the financial sector, has said yes. There was less short-run pain i. Politicians often argue that a good policy is unfeasible because it would cause dislocation to interest groups that have become addicted to subsidies.
A flat taxfor instance, might cause temporary dislocation for some sectors such as housing and employer-provide health insurance. But the long-run gains would be far greater — assuming politicians can be convinced to look past the next election cycle. Fortunately, research in recent decades has helped more and more people realize that this is an upside-down interpretation. Instead, bad government policy caused the depression and then additional bad policy during the New Deal made the depression longer and deeper.
Now we have something similar. Leftists very much want people to think that the financial crisis was a case of capitalism run amok. But the good news is that proponents of good policy immediately began explaining the destructive role of bad government policy.
The Dodd-Frank bill was a response to the financial crisis, but it almost certainly made matters worse. If you want more information on the economic damage caused by bailouts, watch this video and this video. Bailouts, protectionism, subsidies, and other forms of cronyism enable the politically well-connected to […]. Bailouts, protectionism, subsidies, and other forms of cronyism enable the politically well connected to […].
They know […]. Are subsidies cronyism? You can enjoy other great Liberty . - Various - Moral Hazard (CD) from Prager University by clicking here, here, here, here, here, and here.
Because when government rigs […]. Reblogged this on a political idealist. Most Liberty . - Various - Moral Hazard (CD) decisions can be traced to choosing small immediate satisfaction over much much bigger longer term reward. So just as good policy leads to short term pain but long term big gain, the opposite is also true:. Bad policy can lead to short term gain and much much bigger long term loss, or forgone growth is a more accurate description.
The Faustian deal of choosing short term small gain over long term big gain is typically practiced by a majority of voter lemmings. So when the crisis hit, government officials panicked thinking that something really bad may happen during their terms which is totally understandable from a political incentives standpointand thought that massive intervention would likely patch up things softening a bit the short term pain in exchange for a much bigger long term loss.
Now we Liberty . - Various - Moral Hazard (CD) had three years of confirmation on the the long term loss. Not only long term, but likely permanent and irreversible.
A.F.H.O.P.C. - Dianoga - Severed Ties (Discography) (CD), Days Of Victory - Fallen Emperor - Walking To Battle (File, Album), Wanted Dead Or Alive - Bon Jovi - The Ultimate Unplugged Collection (DVD), Marauder - The Telestars - Meet The Telestars (File, Album, MP3), Let Antændelig - Dodo And The Dodos - Dodo And The Dodos 4 (Vinyl, LP, Album), I Cant Get Enough (Ian Carey Remix) - Various - House Passion 3 (CD), Carl Belew - Once / Marys Little Lamb (Vinyl), I Hate To Dance - Mustasch - Thank You For The Demon (Vinyl, LP, Album), Mekong Delta - Live In Frankfurt - Batschkapp 1991 (DVD)