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WASHINGTON (AP) — The Obama administration said Wednesday that it would use bailout money repaid by large banks to support additional capital infusions for smaller banks.
The Treasury secretary Timothy F. Geithnersaid in his comments that the repayment proceeds expected from some of the largest banks would be used “to reopen the application window” for banks with assets under $500 million.
In remarks to the annual meeting of the Independent Community Bankers of America, Mr. Geithner said the window for applying or reapplying, and the deadline for small banks to form a holding company to participate in the program would be open for six months."
Posted By Barry Ritholtz On May 12, 2009 @ 9:57 am In Bailouts, Corporate Management, Credit | 81 Comments
Front page story of today’s NYT[1] discusses the small, well managed, profitable, risk averse banks.
Indeed, as Chris Whalen has so frequently noted, the vast majority of banks in the United States are Triple A by his standards. Its just that these 6,500 banks hold a minority of the total deposits in the nation, with biggest dozen or so banks sitting on 65% or so.
Talk about burying the lead: The Times also noted — in the very last paragraphs — how the big incompetent banks and their very pricey bailouts are screwing these small healthy banks:
“At DeMotte [State Bank, an 11-branch operation in the northwest part of Indiana, Bank President] Mr. Goetz is bracing for a steep increase in a crucial overhead cost: the bill from the Federal Deposit Insurance Corporation, which is basically an insurance fund underwritten by banks.
Last year, DeMotte paid $42,000 into the fund. This year, because of failures in other parts of the country and particularly among national banks, that sum will rise to $500,000 or more.
“Isn’t that the American way?” he says, folding his arms. “Whoever is left standing, whoever was prudent, is always the one who has to pick up the pieces.”
Thus, yet another reason why these bailouts are so absurd: They punish the risk averse and reward the irresponsible . . .
UPDATE, May 12, 2009 10:20am
I emailed William Dunkleberg, who is chairman of Liberty Bell Bank, in Cherry Hill NJ. It has 4 branches, runs the bank conservatively, (i.e., only makes loans to people who will pay them back). The FDIC bill more than doubled to $400k range, basically wiping out profits for this year.
Bill writes:
“They ask us to build capital, lend more, but steal all the “material” we would use to do exactly that! And who wants to buy our shares when we keep reporting virtually no earnings even tho we grow 30%!! and have no unusual loan problems! Last year, FDIC also made us (and thousands of others I am sure) add a few hundred thousand to loan loss reserves. We wont lose the money, so eventually get it back, but this clobbers earnings. Then, adding insult to injury, Ben Bernake takes 500bps off of prime, with a third of our loans tied to prime. I have to write letters to our savers saying “because mega banks need cheap money, I have to cut the rate we pay you on your savings”.
More screwing of the little ones in the economy, little banks, little savers! Why do we have to pay for the big bad banks who finance their assets with 25 cents of domestic deposits on the $1 while we have to use $1 of domestic deposits and pay insurance on that? I guess if we could issue debt like the biggies, we’d get a guarantee but of course small banks can’t economically do that. We can’t permanently keep a block of free federal funds on the balance sheet. So, we don’t have that “cheap money” to boost our profits. Gave a talk to Haverford Trust people yesterday and several in attendance were investors in and/or attended little bank board meetings and report the same hits on profits. bummer!
INDIANAPOLIS — It’s unlikely that any group of professionals is happier to highlight the dullness of their work than small-town bankers.
At a recent conference held here by the Indiana Bankers Association, attendees said it over and over: our business is plodding and boring and we would not have it any other way.
“Banking should not be exciting,” said Clay W. Ewing, president of retail financial services at German American Bancorp, a community bank in Jasper. “If banking gets exciting, there is something wrong with it.”
It is an ethos squarely at odds with the risk-addicted style of megabanks, like Citigroup and Bank of America, that trafficked in the subprime mortgages and complex financial products that helped drive the country into the grimmest recession in decades.
But to the deep chagrin of Mr. Ewing and others at the conference, the public, politicians and the media have made little distinction between the stress-tested behemoths and the 7,630 community banks across the country — the vast majority of which have watched the crisis like bystanders at a 10-car pileup.
As a result, community bankers have felt compelled in recent months to mount public relations campaigns to emphasize their fiscal health and in some cases to announce they rejected Troubled Asset Relief Program, or TARP, funds. Some have held cookouts, others have held “reassurance” meetings in their lobbies, hoping to educate customers and prevent panics. All are dealing with banker jokes and the occasional wisecrack.
“I was on vacation in California and this guy I had just met said, ‘So, traveling on that bailout money, huh?’ ” said Blake Heid, of First Option Bank in Paola, Kan., which didn’t take any bailout money. “I didn’t find that very amusing.”
Though they greatly outnumber the national and regional banks, community banks have barely registered in any of the fallout from the credit crisis, in part because they hold less than 10 percent of the $13.8 trillion in bank assets nationwide.
The 50 or so bank failures have been largely clustered in a few states, like Florida, Arizona and California, where the bursting housing bubble had the greatest impact.
In states like Indiana, where property values never soared, community banks have been rock solid. The last failure in the state was in 1992.
To spend time with these Indiana community bankers is to step into an alternate universe, where everything sounds a little strange because it makes perfect sense. You hear things like, “If you don’t understand the risk you’re taking, don’t take it.” And, “We want to be around for decades, so we’re not focused on the next quarter.”
Forget “too big to fail.” These banks consider themselves too small to risk embarrassment. They are run by people who grew up in the towns where they work, and their main fear is getting into a financial jam that will shame them in the eyes of their neighbors.
The steep profits earned by national banks didn’t turn their heads in the last decade because they were inherently skeptical of double-digit growth rates.
“We like a nice, gentle, upward slope,” said Donald E. Goetz, the president of DeMotte State Bank, an 11-branch operation in the northwest part of Indiana.
“This kind of growth, like you see in the stock market” — Mr. Goetz ran his hand through the air, tracing the shape of a mountain range — “that doesn’t interest us.”
One recent morning Mr. Goetz gave a tour of his bank, which included a bulletin board with fliers for a fire department fish fry and the Kankakee Valley Women’s Club flower sale.
There is a lot of bric-a-brac in his wood-paneled office and a Thomas Kinkade painting of a green-gabled stone house after a snow fall, titled the “Olde Porterfield Gift Shoppe.”
“There is one set of footprints, going in,” he said, pointing to the painting. “That’s how we feel as a business sometime. We’re walking alone.”
Mr. Goetz, who was wearing a tie and a short-sleeve shirt, started as a teller at DeMotte right after he graduated from college in 1976, and he’s been president since 1988. He is a stolid guy who, when asked what he does for fun, offered two words: “Yard work.”
He sounds somewhat aggrieved. His bank, which opened in 1917, didn’t make any subprime loans, nor did it take any bailout money. Even when bank stocks were soaring, not one of his 246 shareholders needled him to earn more than the 3 to 4 percent dividend that DeMotte has generated for years.
Still, he’s had to train employees in the art of assuaging the fears of jittery customers. He programmed the blinking signs outside his branches to read “Safe, Strong, Secure.”
Despite these efforts, he’s fielded some customer calls at night, to his home. In rare cases, people withdrew their savings.
“We had three or four people panic,” he said. “A couple of them said, ‘It’s not the bank. We just don’t trust the government.’ And I told them, ‘If the government fails, the money you’re taking out of this bank won’t be worth anything.’ ”
Mr. Goetz, like a lot of his competitors, is livid about the mortgage shenanigans born of the securitization craze. But he thinks his public relations problem had many authors.
“The media, Congress, the president, everyone just keeps saying ‘the banks, the banks, the banks,’ like we’re all the same thing,” he said. “Well, we’re not all the same thing.”
Explaining that distinction has been especially challenging for community banks that signed up for TARP funds, which initially were pitched by the government as a way to shore up healthy banks. Only later, after the American International Group bonus fiasco, community bankers say, did the TARP acquire a stigma.
“We heard a lot of smart-alecky comments,” said James C. Latta, president of the Idaho Banking Company in Boise, Idaho, which took $6.9 million in TARP funds. “A lot of ‘Wish I had a bailout.’ ”
At DeMotte, Mr. Goetz is bracing for a steep increase in a crucial overhead cost: the bill from the Federal Deposit Insurance Corporation, which is basically an insurance fund underwritten by banks.
Last year, DeMotte paid $42,000 into the fund. This year, because of failures in other parts of the country and particularly among national banks, that sum will rise to $500,000 or more.
“Isn’t that the American way?” he says, folding his arms. “Whoever is left standing, whoever was prudent, is always the one who has to pick up the pieces.”
(1) The autodafé of the unsecured creditors is coming to a US bank near you
A binding budget constraint sure concentrates the mind, even for the US Treasury. There is just one way to make the US government’s policy towards the banks work. That is for the Congress to vote another $1.5 trillion worth of additional TARP money for the banks - $1 trillion to buy the remaining toxic assets off their balance sheets, and $0.5 trillion worth of additional capital. The likelihood of the US Congress voting even a nickel in additional financial support for the banks is zero.
There is no real money left in the original $700 bn TARP facility - somewhere between $ 100 bn and 150 bn - to do more than stabilise a couple of pawn shops. The Treasury has been playing for time by raiding the resources of the FDIC (which, apart from the meagre insurance premiums it collects, has no resources other than what the Treasury grants it) and of the Fed. The Fed has taken an open position in private credit risk to the tune of many hundreds of billions of dollars. Before this crisis is over, its exposure to private sector default risk could be counted in trillions of dollars.
In addition to looking for money in off-budget and off-balance sheet places (and out of sight of Congress), the US Treasury has also tried to hide true extent of the problems of the US banks. I addition to supporting the FASB’s recent proposals for increasing managerial discretion as to the way illiquid assets are accounted for (that is, condoning the issuance of another license to lie), the Treasury appears to be using the ‘Stress Tests’ announced as part of the Financial Stability Plan, as a mechanism to play for time and gamble for resurrection.[1] I base this on what I have been picking up about the reality of these Stress Tests.
1. The actual decline of the real economy thus far is already steeper and deeper than assumed in the Stress Tests.
2. The Stress Tests focus on the 40% of the banks’ balance sheets consisting of securities, rather than on the 60% consisting of conventional loans. The securities (including the toxic waste) is where most of the old problems of the banking sector are concentrated, that is the problems incurred as a result of the pre-August 2007 speculative frenzy. The loan book contains the stuff that will go bad as a result of the steep and deep contraction in real economic activity the US has been in since Q4, but that will not show up in the banks’ reports until this summer at the earliest.
3. The bulk of the information provided to the authorities by the banks is private information to the banks that is virtually impossible to verify independently. Too many banks have lied about their exposure too many times for me to feel confident about the quality of the information the banks have been providing as part of these Stress Tests.
As a result I now expect a clean bill of health for the banks from the Stress Tests. For most banks this will turn out to be incorrect before the end of the year. At that point, the de facto insolvency of much of the US border-crossing banking system will become so self-evident, that even the joint and several obfuscation of banks and Treasury will be unable to deny the obvious. There still will be no fiscal resources available to sanitise the banks’ balance sheets by purchasing or guaranteeing the old toxic assets and new bad assets.
At that point, only the ‘good bank solution’, which requires either a serious hair cut for unsecured creditors or a mandatory conversion of debt into equity will be viable, simply because the bad bank solution requires additional public money which isn’t there. (You creating a new good bank out of the assets of the old bank and the insured deposits and counterparty claims on the old bank, leaving the unsecured creditors of the old bank with a claim on the equity in the new good bank; a bad bank requires funds to buy the toxic and bad assets from the old bank and addition resources to capitalise the bad bank).
We will have wasted a lot of time - the good bank solution and the slaughter of the unsecured creditors should have been pursued actively as soon as it became clear that most of the US border-crossing banking system was insolvent, but for past, present and anticipated future tax payer support. If the Treasury can be pushed into a pro-active policy by declaring, just before the beginning of the weekend, that most of the banks undergoing the Stress Test have failed them and moving these wonky institutions straight into the FDIC’s special resolution regime where they can be restructured according to the good bank model, we could have well-capitalised banks capable of new lending and borrowing by the beginning of next week.
The same policy should be pursued wherever banks have failed: it never makes sense to put the interests of the unsecured creditors before those of the tax payers. It is bad economics in the short run and in the long run. And it is political poison. I fear, however, that only in those countries where there is no fiscal spare capacity (as in the US, for political reasons or in Iceland, for economic reasons), the right solution to bank restructuring will be adopted. Elsewhere the unsecured creditors will continue to feed off the carcases of the tax payers and the beneficiaries of public spending programs that will have to be sacrificed to foot the bill.
(2) Too big to fail means too big
No country should ever find itself in position of Iceland, with systemically important banks or other financial institutions that are too large to save. The fiscal spare capacity of the government (its ability to raise future primary (non-interest) surpluses has to be sufficient to take care of any possible solvency gap in the systemically important part of their financial institutions.
If the too big to save problem can be resolved rather easily, the too big to fail issue has been with us for so long that one assumes there must be powerful forces sustaining large and complex financial institutions. The assumption is correct, but these forces are political, not economic or efficiency-related. Economies of scale for banks are exhausted well before a balance sheet size of $100 bn is achieved. Synergies between commercial banking and investment banking activities are essentially non-existent. The multiplication of products and services offered and of roles played by a financial institution can be privately profitable, because it allows the exploitation of the gains from conflicts of interest. Chinese walls, the industry’s answer to potential conflicts of interests, are aptly named. The Great Wall of China never kept the barbarians out or the Chinese in. Chinese Walls in banks, auditing companies, rating agencies and other financial enterprises don’t stop any information that is commercially profitable from getting across the boundaries. Financial supermarkets lose focus and ultimately become Citigroup - a conglomeration of worst-practice from across the financial spectrum.
There is no ‘too interconnected-to-fail’ problem separate from the ‘too-big-to-fail’ problem. I can be infinitely interconnected. If I operate on a small scale, I and my interconnections are immaterial from a systemic stability perspective.
Banks and other financial supermarkets want to be large for two reasons. The first is monopoly power. This causes banks to want to be large in any specific activity. It’s common to every industry and to all human activity. That’s what we ought to have anti-trust or pro-competition policies for. The second reason is that financial supermarkets can shelter non-systemically important profitable operations under the heavily subsidised public umbrella provided by the state to a few systemically important operations (deposit taking, payment, clearing and settlement systems, counterparty and custodial services) though lender-of-last-resort support (provided by the central bank) and through recapitaliser-of-last-resort support (provided by the Treasury).
There is no economic reason for large banks. Therefore banks should be kept small. An obvious mechanism (apart from aggressive anti-trust policy) is to tax bank size. One way to do this is through making regulatory capital requirements increasing in the size of the bank’s activities. For instance, tier one capital as a share of (unweighted) assets could be made an increasing function of the value of the assets. Gary Becker has made a similar proposal.
Governments everywhere should be focusing on breaking up banks and keeping them small. If some banking activity (or indeed any other economic activity) is deemed to have a minimum optimum scale that is makes it too large to fail, it should be publicly owned. Small is beautiful for banks.
(3) The repatriation of cross-border banking
Even if we agree that a particular bank or other financial institution is too large to fail, as soon as there are multiple fiscal authorities and border-crossing banks, there remains the unanswered question as to who should bail it out. The host country fiscal authority? The home country fiscal authority? Both together through some ex-ante or ex-post negotiated sharing rule? A dedicated supranational fiscal authority?
Recent events have made it clear that, as my colleague Charles Goodhart puts it, international financial institutions are international in life, but national in death. Any systemically important financial institution has to be backed by a central bank (for short-term liquidity support) and by a Treasury or ministry of finance (for recapitalisation and other long-term financial support when insolvency is the issue). If both your liquidity and your solvency are publicly insured or guaranteed (at highly subsidised rates), you need to be regulated and supervised, lest you be tempted to take insane risks.
This means that conventional border-crossing banks and other systemically important financial institutions will become a thing of the past. We will not see the kind of cross-border branch banks that we have seen during the past decades for very much longer. These foreign branches are not independently capitalised, have no independent, ring-fenced sources of liquidity, are often effectively managed from the home country (the country of the parent bank), are regulated and supervised by the home country regulator and supervisor, with lender-of-last-resort support (if any) from the home country central bank and fiscal support (if any) from the home country Treasury.
In the European Union, the relevant sections of the financial services action plan are now dead and need to be replaced unless we (a) get a single European supervisor and regulator for border-crossing banks and other systemically important financial institutions and (5) create a supranational fiscal Europe capable of dealing with insolvency threats to border-crossing systemically important financial institutions. Without a single regulator-supervisor and a sufficiently developed ‘fiscal Europe’, the principles of mutual recognition and the “single passport”, a system which allows financial services operators legally established in one Member State to establish/provide their services in the other Member States without further authorisation requirements, will not be permitted to operate in the field of banking and other systemically important border-crossing financial institutions and products. Need I say Icesave? (for a further discussion of the issues involved see the paper by Charles Goodhart and Dirk Schoenmaker (2009), “Fiscal Burden Sharing in Cross-Border Banking Crises” International Journal of Central Banking, Vol. 5, No. 1, 141-165,
There will no doubt continue to be cross-border banking subsidiaries. These will, however, be independently capitalised. Their liquidity will not be pooled between parent and subsidiaries, but will have to be ring-fenced for each subsidiary. They will be regulated and supervised by the host country (as they often are today). Lender-of-last-resort support, if any, will be provided by the host country central bank (as it often is today) and fiscal support when insolvency threatens will be provided by the host country fiscal authority.
The reason for host country supervision and regulation is simple: the pain is local, so the control will have to be local. The reason for host-country bail-outs is even simpler: tax payers are national. They will not accept the use of their taxes in bail-outs of foreign shareholders, unsecured creditors and counterparties. The US authorities have been able to channel somewhere between $40 bn and $50 bn of US tax payers’ money to foreign counterparties of AIG, but that is unlikely to be the new status quo. They got away with it, thus far, because the foreign bail-outs by the US tax payer was hidden in obscure, indeed barely comprehensible financial transactions.
But we should not expect the US taxpayer to stand behind foreign subsidiaries of US banks and other systemically important US financial institutions, unless a convincing case can be made that there is a material direct US financial exposure. If all the parent has at stake in its foreign subsidiary is its equity in the subsidiary, the US tax payer will not bail out the foreign subsidiary. If the parent has further exposure, through parent-to-daughter loans, through the parent having invested in securities issued by the subsidiary or as a counterparty, there may come a point at which the financial exposure of the parent becomes sufficiently large to induce a response by the US tax payer. But given the current mood of the tax payer, I don’t expect to see rescues of foreign subsidiaries anytime soon.
The same applies to the UK and to other European countries with banks that have large foreign subsidiaries. I don’t expect the British government to bail out the foreign subsidiaries of RBS, Lloyd’s Group, Barclays or HSBC. I would expect the British government to look seriously at bailing out UK subsidiaries of foreign banks, should these be threatened with insolvency, especially if most of the substantive economic activity of these banks is in the UK. For instance (what follows is a pure hypothetical - I know of nothing that would lead me to question the financial soundness of Abbey), I would not expect the Spanish government ever to bail out Abbey (owned by the Spanish bank Santander), but I would expect the UK Treasury to show an active interest.
Individual parent banks may decide to try to rescue their foreign subsidiaries, even when the subsidiaries in question appear to have gone belly-up by normal commercial standards. An extreme example of this is HSBC - reported to have incurred losses estimated to be somewhere between $30 bn and $62 bn (accounting does not appear to be an exact science) on its US credit card issuer and subprime lender, Household Finance Corporation (HFC), now renamed HSBC Finance, which it acquired at the end of 2002. Even though HSBC announced, in March 2009, that it would shut down the branch network of its HSBC Finance subsidiary in the U.S, it is continuing to operate the HSBC Finance credit card arm.
HSBC could, in the opinion of many observers, have saved itself a bundle by cutting its losses and walking away from HFC when the scale of the subprime debacle became apparent late in 2007. There is a clear clash here between reputation and goodwill considerations on the one hand and throwing good money after bad on the other. This, however, is a matter for the shareholders and other stakeholders of HSBC and its management. It is a corporate governance problem. It is not a matter for the UK tax payers, unless HSBC’s HFC-related losses come to haunt it in the future and drive the parent into the arms of the UK tax payer after all. Should that happen, I hope the British authorities will take to heart all three of these ruminations.
Forward Looking Assessment - Stress Test: A key component of the Capital Assistance Program is a forward looking comprehensive “stress test” that requires an assessment of whether major financial institutions have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected.
Requirement for $100 Billion-Plus Banks: All banking institutions with assets in excess of $100 billion will be required to participate in the coordinated supervisory review process and comprehensive stress test. “
They're about the pros rather than the amateurs. Which may be why they're so cavalier about exacting fees and penalties on individual depositors at levels they'd never consider applying to professional markets. Indeed, pretty good research suggests that as banks get bigger — which tends to mean more competitive on the global financial market — they begin charging consumers more.
This seems to be true. Take a look at the chart on the right from today's Wall Street Journal. It shows that banks receiving bailout funds have increased fees at a far higher rate than banks that haven't.
Does this show that banks receiving federal assistance are more likely to raise their fees and penalties? Of course not. This trend is nine years old. However, it's big banks that have received most of the TARP money, so you can pretty much replace "Banks receiving TARP funds" with "Big banks." So what the chart shows is that big banks have increased their fee and penalty structure far more than small banks.
Why? Because they can. And in the past they've wielded enough political power to prevent Congress from doing anything about it. If there's any justice — and needless to say, that's still an open question — those days are finally gone."
Much has been made about the problems with credit flows. But Federal Reserve governor Elizabeth Duke suggests in a speech today in Charlotte, N.C., that while a lot of attention has focused on the biggest banks, smaller institutions have boosted lending. Here are some highlights from her remarks:
Duke
Even though the total provision of financial intermediation services by banks remained high relative to other financial intermediaries and their on-balance-sheet financial intermediation services increased in the fourth quarter of 2008, it must be recognized that there are many types of banks in the United States with different specializations, geographic concentrations, and comparative advantages. Consequently, the extraordinary stress in the financial system, the downturn in the U.S. and global economies, and the associated reductions in asset values have affected each bank differently.
Much attention has been focused on the negative loan growth of the largest five bank holding companies in the fourth quarter of 2008–about negative 16 percent at an annual rate on a merger-adjusted basis. The next 20 largest bank holding companies had a notably smaller decrease in loans over the same period–about a negative 4-1/4 percent rate of decline–and other (smaller) bank holding companies increased their lending at about a 5 percent pace. This loan growth may reflect that smaller banks in strong financial condition are finding that they can gain creditworthy customers–even in the current economic environment–as other banks cut back on lending to conserve capital and liquidity. Smaller banks may also be finding opportunities to reclaim consumer and business customers from nonbank competitors who have pulled back as the securitization markets have dried up."
In August 2008 I joined the Board of Governors of the Federal Reserve System, leaving behind a 30-year career as a commercial banker to become a central banker. My time as a commercial banker spanned numerous business cycles. It also encompassed at least one severe financial system crisis, in the late 1980s through the early 1990s, albeit one that was not as severe as the current one. From my time as a commercial banker, I already understood the factors considered by bankers in the initial lending decision as well as those in loss mitigation when collecting those same loans. As a central banker, I have come to appreciate even more fully the role of credit in our economic well-being. So I thought it would be appropriate for me to provide my perspective on credit conditions in our economy and the current crisis.
Today, I would like to discuss a three-dimensional view of the flow of credit to households and businesses and describe the evolving role of banks in the U.S. economy. I will begin by taking a look at recent trends in aggregate borrowing by households and by the nonfinancial business sector. These trends will be placed in a historical context by looking back at previous booms and busts in the credit cycle. One might call this the "macroeconomic view" of credit. When looking at aggregate borrowing, it is important to remember that a change in debt outstanding can be driven by any one of three factors or, more commonly, a combination of all three. In the macroeconomic view of credit, I will discuss indicators related to changes in demand for credit. I will also examine two determinants of the supply of credit. The first determinant relates to lenders' assessment of the creditworthiness of borrowers given future economic conditions. The second relates to credit constraints caused by the financial condition of the lenders. Although fiscal and monetary policies that improve macroeconomic conditions will also boost the demand for credit and improve the creditworthiness of borrowers, if credit is constrained by the balance sheets of the banks, only programs to relieve such strain will improve credit availability. This condition is the reason for the injections of capital into banks through the Troubled Asset Relief Program, or TARP, and the financing provisions offered through the Public-Private Investment Program, or PPIP, as well as the expansion of Federal Deposit Insurance Corporation (FDIC) deposit and nondeposit guarantee programs.
Next, I will consider the providers of credit. Using the Federal Reserve's flow of funds data, I will look at the evolution from 1950 to 2008 in the market shares of financial intermediation for banks, thrifts, insurance companies, and "other" firms, which range from finance companies to the entities that issue asset-backed securities (ABS). Although these data could suggest that the importance of banks has significantly diminished, I will argue that it matters how we measure what banks have been doing. In particular, it is important to take into account the off-balance-sheet activities of banks when securitization became more pervasive and when it abruptly stopped. This "financial intermediation view" of credit, in my opinion, illustrates the importance of supporting the availability of all forms of lending, whether it be on-balance-sheet lending by banks, credit originated by banks and securitized and sold to investors, or credit supplied by nonbank lenders.
The Federal Reserve has long served as a lender to banks, providing them with liquidity to maintain lending in times of stress. Over the past year and a half, however, the Federal Reserve has greatly expanded its provision of liquidity, establishing facilities under which we auction term funding to banks on a secured basis, provide liquidity to primary dealers and money market mutual funds, and supply credit to issuers of commercial paper. In addition, through our purchases of agency debt and mortgage-backed securities, the Federal Reserve is lowering the cost of borrowing for mortgages as well as creating an outlet for loans that are originated by banks and nonbanks and securitized by the agencies.1 Most recently, the Federal Reserve, in conjunction with the Treasury, has established the Term Asset-Backed Securities Loan Facility, or TALF, which uses capital provided by the Treasury in combination with liquidity provided by the Federal Reserve to enhance the availability of credit to households and businesses.
Because banks remain central to financial intermediation, they deserve a closer look, particularly during this time of financial-sector turmoil. In my discussion of the "banking view" of credit, I will summarize the current state of the banking industry. As you know, banks play a special role in just about every economy in the world, and the United States is no exception. Banks' liabilities are generally more liquid than their assets. They are also the main repositories of deposits, which provide immediately available liquidity to households and businesses and are used to undertake transactions for goods and services. In addition, banks provide intermediation between borrowers and savers. Indeed, banks remain the principal source of finance for a large part of the economy. Given these important and distinctive functions, it is, perhaps, obvious that adverse shocks to the financial system and the banking industry can have detrimental effects on economic activity. The current financial turbulence, like several similar events in the past, has placed severe strains on the U.S. banking system with serious repercussions for the economy as a whole.
The "Macroeconomic View" of Credit Looking back over the past 50 years or so, credit extended to households and businesses has almost always declined just before, and during, economic downturns. And almost as often, a debate has ensued about whether the nation was in a "credit crunch."2 According to the White House Council of Economic Advisers, "a credit crunch occurs when the supply of credit is restricted below the range usually identified with prevailing market interest rates and the profitability of investment projects."3 Judging whether a credit crunch is happening in real time is not easy. It is extremely difficult to sort out the relative importance on the flow of credit of reduced demand due to weaker economic activity, reduced supply because borrowers appear less creditworthy, or reduced supply because lenders face pressures, such as a shortage of capital, that restrain them from extending credit. In other words, while demand considerations could certainly result in a decline in credit flows, a reduction in the supply of credit--caused either by bank balance sheet pressures or by banks reluctant to lend to less-creditworthy borrowers--could produce the same result.
Figure 1 presents annualized quarterly percent changes in debt growth for home mortgages in the United States from 1952 to 2008, with shaded areas denoting National Bureau of Economic Research recession periods. Strikingly, the quarterly rate of growth for home mortgage debt, which includes mortgages and drawn-upon home equity lines, has typically declined before and during each recession and then picked up when economic conditions improved. What is different this time around is the runoff in home mortgage debt: It declined in the fourth quarter for the first time in more than 50 years. The recent decline in mortgage debt was likely partly driven by weaker demand for housing amid rising unemployment and rapidly falling home prices.
It is equally likely that supply-side considerations have played a role. First, the run-up in mortgage delinquency rates and the higher loss rates associated with reductions in collateral values indicate that the creditworthiness of borrowers has declined. The unprecedented increase in mortgage defaults has resulted in more foreclosures and tighter mortgage lending terms, which are shown from 1990 onward in figure 2. Although the net fraction of banks tightening lending standards on mortgage loans was about 50 percent in our most recent Senior Loan Officer Opinion Survey on Bank Lending Practices, it should be noted that most banks had already tightened their lending standards substantially in 2008. Second, the shutdown of the private mortgage-backed securities market has placed greater pressures on bank balance sheets not only to provide credit to borrowers with damaged credit histories, but also to provide so-called jumbo mortgages that are originated in amounts that are over the conforming loan limits applicable to loans sold to or guaranteed by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac and by Ginnie Mae. Of course, credit provision to some borrowers was helped through mortgage insurance programs offered by the Federal Housing Administration, which were recently expanded by the Congress through increases in coverage levels. Similarly, other borrowers have been able to qualify for mortgages that became eligible for securitizations by the GSEs because of increases in conforming loan limits. Indeed, as the non-agency mortgage-backed security market contracted by roughly 15 percent in 2008, Ginnie Mae increased its outstanding supply of single-family mortgage-backed securities by roughly 33 percent. Even with the growth of such securitizations, banks still needed to expend some balance sheet capacity to warehouse loans on their books prior to securitization.4
In response to these supply-side developments, the Treasury, the FDIC, and the Federal Reserve have encouraged banks to work with existing borrowers to avoid preventable foreclosures.5 The Federal Reserve and the other banking agencies also have encouraged banking organizations to participate in the Treasury's Home Affordable Modification Program.6 Doing so should help to stem the runoff in mortgage debt and to damp the added downward pressure on house prices that can occur when neighborhoods have clusters of foreclosed properties. In addition, the Treasury's Capital Assistance Program, the FDIC's Temporary Liquidity Guarantee Program, and the Federal Reserve's programs to provide liquidity are intended to help ease the funding and balance sheet pressures banking organizations face, thereby allowing them to undertake responsible lending activities, including new mortgage originations.
I will now turn to nonmortgage consumer credit, which is shown in figure 3. The growth rate for consumer credit has been trending down, on balance, for years, but it remained quite robust until the latter half of last year. Indeed, consumer credit fell quite sharply in the fourth quarter. Looking back over the past 50 years, nonmortgage consumer credit typically weakens throughout a recession as labor markets deteriorate and often turns down even after the recession ends. Thus, history suggests that consumer credit growth will likely slow further in the near term; in addition, many banks have tightened terms and standards for nonmortgage consumer loans.
Turning to the business sector, and in particular the corporate sector, the major components of borrowing are bonds, commercial paper, commercial mortgages, and commercial and industrial bank loans. As shown in the left panel of figure 4, gross bond issuance for investment-grade firms increased in the fourth quarter of last year from a very weak third quarter and seems to have increased further in the first quarter of this year as firms appear to have strengthened their balance sheets by shifting toward longer-term debt. In contrast, speculative-grade bond issuance has remained sluggish.
In September 2008, nonfinancial corporations' commercial paper outstanding contracted (the black solid line in the right panel of figure 4), as money market mutual funds--ordinarily major investors in commercial paper--faced significant strains. Losses on Lehman Brothers paper led one prominent fund to "break the buck"--that is, to fail to maintain a net asset value of $1.00 a share--which undermined investor confidence in such funds and triggered significant withdrawals from funds that typically invest in private-sector debt. In response, the Treasury established an insurance program for money market mutual fund investors, and the Federal Reserve introduced new programs to provide liquidity to money market mutual funds. In addition, the Federal Reserve authorized the Commercial Paper Funding Facility to provide a liquidity backstop for U.S. issuers of commercial paper.7 These programs helped to restore confidence in money market mutual funds and improve the functioning of the commercial paper market. By early this year, the strains in the commercial paper market had eased notably.
The volume of bank lending in 2008 mirrored developments in the commercial paper market. In the fall, bank commercial and industrial lending surged for a time (the red dotted line in the right panel of figure 4), reportedly reflecting, in part, substantial draws on previously existing long-term lending commitments; then such lending contracted sharply as access to other sources of funding, such as commercial paper, improved. In this manner, bank loans provided at least a partial substitute for market-based funding until market functioning improved. That said, the growth rate for debt of nonfinancial businesses decreased sharply in 2008.
As shown in figure 5, debt growth for nonfinancial corporate businesses reached almost 15 percent at the peak of the business cycle in December 2007, but it was less than 3 percent by the end of 2008. Looking back, it is apparent that debt growth for nonfinancial corporate businesses can, and often does, decline sharply as the economy slows. During recessions, which are indicated in the figure by shading, debt growth has typically decreased and sometimes even become negative, such as during 1990-91. In part, such declines in debt growth are derived from declines in demand for the goods and services produced by nonfinancial firms. In addition, such declines reflect the ongoing tightening of lending standards that can result from the deterioration of the fundamentals that support lending.
Turning to commercial mortgage growth, figure 6 presents such data from the 1950s through 2008. As with the debt series plotted in previous charts, commercial mortgage growth typically drops off during a recession as retail sales slow and less office space is needed for workers. Especially striking is the prolonged contraction in commercial mortgages outstanding after the 1990-91 recession. Since the peak of the recent business cycle, commercial mortgage growth has slowed with each passing quarter. By the fourth quarter of 2008, its annualized growth was only about 1 percent.
The "Financial Intermediation View" of Credit The commercial paper market example, which I briefly described earlier, highlights the fact that financial intermediaries can play an important safety-valve role for the financial system. When the commercial paper market suddenly dried up, financial intermediaries were able to fund firms that had unused lines of credit or other commitments.8 Moreover, the Federal Reserve, through its lending programs, contributed to improved conditions in the commercial paper market so that issuance of these short-term funding instruments could resume.
In today's economy, much of the flow of credit comes from lending that occurs outside of the banking system. Here again, it is useful to take a historical look at financial intermediation to better understand the potential effect on the availability of credit to households and businesses from the recent shutdowns in the securitization and commercial paper markets and to get a first glimpse at how financial intermediation markets responded.
Consider, for example, the shares of commercial mortgages outstanding--funded by depositories, insurance companies, other financial institution, and commercial mortgage-backed securities (CMBS)--presented in figure 7. The share funded by CMBS (the orange line) increased from almost nothing in 1990 to almost 30 percent in 2008. In an accounting sense, most of this increase in funding from the capital markets came at the expense of direct holdings of whole loans by insurance companies (the dashed green line) and other intermediaries (the black line), whose funding shares fell by half between 2000 and 2008. In contrast, depositories' share of commercial mortgages outstanding (the purple line) held steady from 1990 through 2007. In 2008, the decrease in the commercial mortgages funded by CMBS--the downtick of the orange line at the end of the sample--was offset by an increase in commercial mortgages funded by depositories--the uptick of the purple line. These data suggest that depositories increased their share of commercial mortgages as securitization markets stalled in 2008. Again, banks and other depositories served an important safety-valve function for the commercial mortgage market.
In figure 8, Federal Reserve flow of funds data are used to construct market shares of all financial intermediation provided by four major classes of institutions: banks, thrifts, insurance companies, and "other financial intermediaries," which range from finance companies to the entities that issue ABS.9 In 1950, banks' share of financial intermediation (the red line) was about 50 percent; it declined and then rose to about 48 percent in the mid-1970s, then it trended down to about 33 percent at the turn of the century. From the fourth quarter of 2007 to the fourth quarter of 2008, this measure of total financial intermediation grew by about 5 percent. At the same time, the banking system's share increased from 32.8 percent to 33.4 percent--a 0.6 percentage point increase in market share. Thrifts and insurance companies--represented by the blue solid and green dashed lines, respectively--had declines in their market shares in the fourth quarter of 2008.
In figure 9, the shares for banks and thrifts are combined so that there is a depositories' share of this measure of U.S. financial intermediation (the purple line). Comparing the purple line for the depositories' share with the black line for other financial intermediaries' share, it is apparent that these lines mirror one another. Although both of these shares equaled 40 percent in 2001, by the end of 2008, the other financial intermediaries' share had increased to 45 percent, but the depositories' share had decreased to 38 percent. Interestingly, the shares for other financial intermediaries and for depositories continued their respective upward and downward trends despite the disruptions in securitization and financial markets during 2008.
Turning back to banks, the standard market shares of financial intermediation reported in figures 8 and 9 neglect their off-balance-sheet activities. Such off-balance-sheet intermediation has generated considerable earnings for banks. For example, banks receive fees for lines of credit regardless of whether borrowers use the lines of credit. In addition, securitization activities have provided many benefits to banks. Even when banks have not securitized the loans, such as when mortgages were securitized by the GSEs, banks often originated and serviced the loans that were pooled and have earned fees in the process. If one adjusts the financial intermediation data for banks to include "credit equivalents" for the off-balance-sheet activities of banks, then the adjusted market share of financial intermediation for banks would remain above 40 percent in recent years.10 These adjusted financial intermediation data are shown using the red dashed line in figure 10.11 With the near shutdown in securitization markets, adjusted bank assets declined from almost 45 percent in fourth quarter 2007 to 42 percent in fourth quarter 2008. Even with this decline, however, banks' adjusted share of financial intermediation would be in the higher end of the range observed since the 1980s.
These adjusted financial intermediation data, however, do not tell the full story. Ideally, we also would want to adjust the data for all of the other financial intermediaries to include credit equivalents for their off-balance-sheet activities. Unfortunately, the data do not exist to make such an adjustment. Nor do the data generally exist to convert the fee income that financial intermediaries generate by off-balance-sheet activities into balance-sheet equivalents. That said, the adjusted flow of funds data suggest that banks have remained important financial intermediaries despite the growth (and disruption) in securitization activities and the arrival of new competitors.
The "Banking View" of Credit Even though the total provision of financial intermediation services by banks remained high relative to other financial intermediaries and their on-balance-sheet financial intermediation services increased in the fourth quarter of 2008, it must be recognized that there are many types of banks in the United States with different specializations, geographic concentrations, and comparative advantages. Consequently, the extraordinary stress in the financial system, the downturn in the U.S. and global economies, and the associated reductions in asset values have affected each bank differently.
Much attention has been focused on the negative loan growth of the largest five bank holding companies in the fourth quarter of 2008--about negative 16 percent at an annual rate on a merger-adjusted basis. The next 20 largest bank holding companies had a notably smaller decrease in loans over the same period--about a negative 4-1/4 percent rate of decline--and other (smaller) bank holding companies increased their lending at about a 5 percent pace. This loan growth may reflect that smaller banks in strong financial condition are finding that they can gain creditworthy customers--even in the current economic environment--as other banks cut back on lending to conserve capital and liquidity. Smaller banks may also be finding opportunities to reclaim consumer and business customers from nonbank competitors who have pulled back as the securitization markets have dried up.
A decomposition of changes in loans held on bank balance sheets across banking organizations in the three size groups provides a glimpse into how diverse the portfolio changes were across banks in the fourth quarter of 2008.12Figure 11 presents balance sheet changes for loans held by the banking organizations in all three size groups. The heights of the red bars indicate declines in loan categories measured in billions of dollars, and the heights of the blue bars indicate increases in loan categories, also measured in billions of dollars. For each bank-size group, the bars within the panel add up as one looks from left to right, so that the total dollar-value change in lending is measured either by the bottom of the bar (if loan growth, on net, is negative) or by the top of the bar (if loan growth, on net, is positive). The number at the bottom (or top) of each bar provides the net decrease (or increase) in loan amounts as one adds the changes from left to right within a bank-size category.13
The left panel of figure 11 contains changes in loans (on a merger-adjusted and seasonally adjusted basis) held on the books of the largest bank holding companies, which together ended the quarter with $6.4 trillion of balance sheet assets. These firms reduced their loan holdings by about $119 billion, which is indicated at the bottom of the right-most bar in the left panel. Declines were substantial in commercial and industrial loans ($19 billion), real estate loans ($47 billion), and consumer loans ($13 billion).
The middle panel of figure 11 contains loan changes for the next 20 largest banking organizations, which together ended the quarter with about $5.2 trillion of balance sheet assets. Together, these organizations increased their commercial and industrial loans (by $3 billion), real estate loans (by $7 billion), and consumer loans (by $4 billion) as of year-end 2008. That said, the category of 'other loans and leases" fell by more than enough to offset those increases. Total loans held on the balance sheets of banks in this group decreased by about $9 billion over the fourth quarter.
The right panel of figure 11 presents the increases in loans held by banking organizations not included in the largest 25. These organizations ended the quarter with $3.3 trillion of balance sheet assets. These entities increased their holdings of commercial and industrial loans (by $4 billion), real estate loans (by $17 billion), and consumer loans (by $9 billion). On net, bank holding companies and banks in this size class increased their lending by about $27 billion--far less than the reductions in lending at banks in the larger-size groups.
Within real estate loans, residential mortgage holdings by banking organizations declined sharply over the second half of 2008. In part, this decline reflected a slower pace of originations owing to tighter lending standards and weaker demand. But this decline also reflected the fact that banks continued to originate and sell mortgages to the GSEs as this securitization mechanism has continued to function. In contrast, home equity loan growth has recently been brisk as borrowers tapped their existing lines of credit. Unlike mortgage loans, home equity loans tended to remain on bank balance sheets. Abstracting from a couple of bank restructuring events, growth in consumer loans--the other category of household lending--was weak in the fourth quarter, in line with lackluster retail sales and declines in consumer confidence. Originations may pick up as the TALF gains traction and ABS can be issued that are collateralized with such loans.14
Turning to business lending, commercial and industrial lending, which, as previously discussed, had surged during the period of particularly acute financial stress in September and October, was very weak during the fourth quarter, and commercial mortgage holdings remained flat.
Changes in the liabilities of banks were equally diverse across the three banking organization size groups. Figure 12 has the same format as figure 11, with each red bar indicating a decline in a liability type and each blue bar indicating an increase in a liability type. As with figure 11, the data are merger-adjusted and seasonally adjusted. The figure presents changes in core deposits; large time deposits, which are deposits in denominations greater than $100,000; other managed liabilities; and other liabilities. Other managed liabilities mostly consist of foreign-booked deposits, demand notes issued to the Treasury, other borrowed money, and federal funds purchased and securities sold under repurchase agreements. Other liabilities are noninterest earning liabilities such as trading liabilities. Numbers at the top and bottom of each bar within a panel represent the sum of liability changes as one looks from left to right. As with lending growth, the growth in core deposits at U.S. banking organizations was likely influenced by both demand-side and supply-side considerations as well as by government policies implemented to improve financial conditions.
Core deposits, which consist of the sum of transaction deposits, savings deposits (including money market deposit accounts), and small time deposits issued in denominations of less than $100,000, expanded at banking organizations of all sizes in the fourth quarter. In part, this deposit growth reflected lower opportunity costs of holding monetary assets as declines in market rates outpaced those on core deposits. In addition, this growth was likely influenced by the increases in deposit insurance coverage that were announced in October 2008.15
Deposit growth also likely reflected bank-led initiatives to increase their deposit funding in order to reduce their reliance on managed liabilities, such as large time deposits and borrowings from the Federal Home Loan Banks, and also to fund future lending opportunities. This substitution of deposits for managed liabilities was particularly pronounced at the 25 largest banking organizations: These banking organizations reduced the category of "other managed liabilities" by about $120 billion. In contrast, banking organizations not included among the largest 25 increased their other managed liabilities by $30 billion (although managed liabilities are, in general, a smaller fraction of these banks' overall liabilities).
Conclusion Today, we have taken a three-dimensional view of the flow of credit to households and businesses and described the evolving role of banks in the U.S. economy. The macroeconomic view of credit highlighted the importance for the flow of credit of reduced demand due to weaker economic activity, reduced supply because borrowers appear less creditworthy, and reduced supply because lenders face pressures that restrain them from extending credit. The financial intermediation view of credit highlighted that banks have remained important financial intermediaries long after the originate-to-distribute model for funding credit became the dominant model and can play an important safety-valve role for the financial system. Finally, the banking view of credit emphasized that there are many types of banks in the United States, and the extraordinary stress in the financial system, the downturn in the U.S. and global economies, and the associated reductions in asset values have affected each bank differently. As such, some banks have likely fulfilled the credit needs of consumers and businesses that had been turned away by their peers. For all of these reasons, the Federal Reserve is committed to employing all available tools to promote economic recovery and to preserve price stability.
Footnotes
1. Agency debt means debt issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Return to text
2. Kaufman (1991) cites credit crunches that occurred in 1959, 1969-70, the mid-1970s, 1981-82, and 1990-91. See Henry Kaufman (1991), "Credit Crunches: The Deregulators Were Wrong," Wall Street Journal, October 9. See also Albert Wojnilower (1980), "The Central Role of Credit Crunches in Recent Financial History," Brookings Papers onEconomic Activity, vol. 2, pp. 277-326. Return to text
3. Council of Economic Advisers (1992), Economic Report of the President (Washington: Government Printing Office), p. 46. Return to text
4. See Inside Mortgage Finance Publications (2009),"Mortgage Securities Market Continued to Shrink in Late 2008despite Agency Growth," Inside MBS & ABS, March 20, p.7. Return to text
7. Under the Commercial Paper Funding Facility, authorized on October 7, 2008, the Federal Reserve Bank of New York finances the purchase of unsecured and asset-backed commercial paper from eligible issuers through its primary dealers. Only highly rated, U.S. dollar-denominated, three-month commercial paper is eligible for financing. Return to text
9. Figure 8 and figure 10 update those in Ron J. Feldman and Mark Lueck (2007), "Are Banks Really Dying This Time?" Federal Reserve Bank of Minneapolis, The Region (September), pp. 6-9 and 42-51. These authors kindly updated their analysis for these remarks. See also John H. Boyd and Mark Gertler (1994), "Are Banks Dead? Or Are the Reports Greatly Exaggerated?" Federal Reserve Bank of Minneapolis, Quarterly Review, vol. 18 (Summer), pp. 2-14. In both cases, "other financial intermediaries" include mutual funds; closed-end funds; exchange-traded funds; ABS issuers; finance companies; real estate investment trusts, or REITs; brokers and dealers; and funding corporations; but exclude the GSEs. Return to text
10. The financial intermediation data were adjusted for banks' off-balance-sheet activities using techniques described in Feldman and Lueck (2007) and Boyd and Gertler (1994) (see note 9). Return to text
11. Exposures include the following types of off-balance-sheet activities: standby letters of credit, participation in bankers' acceptances, retained recourse on assets sold, securities lend, derivatives and unused loan commitments. Bank supervisors weight the volume of these activities by a conversion factor to obtain their credit equivalent. Because of modifications to Call Reports, the off-balance-sheet activities with available credit equivalents have changed over time. Return to text
12. Bank subsidiaries were rolled up to the bank holding company level. Return to text
13. The category labeled "other loans" in figure 11 includes loans to finance agricultural production, loans to foreign governments and official institutions, interbank loans, obligations of states and political subdivisions, as well as lease financing receivables. The most important of these subcategories varies across banks of different sizes. For example, over the last five years, the largest category of other loans was interbank loans for the 5 largest banks, lease financing receivables for the 6 to 25 largest banks, and loans to finance agricultural production for the remaining banks. Return to text
14. The TALF will help market participants meet the credit needs of households and businesses by supporting the issuance of ABS. This support is in the form of nonrecourse loans provided by the Federal Reserve Bank of New York and capital support provided by Treasury under the TARP. Return to text
15. The Emergency Economic Stabilization Act of October 3, 2008 temporarily raised the maximum coverage on all deposits at depositories to $250,000 from $100,000. On October 14, the FDIC announced its temporary Transaction Account Guarantee Program that provides depositors with unlimited coverage for noninterest-bearing transactions accounts if their bank is a participant in the FDIC program. This program is scheduled to end on December 31, 2009. Return to text
These figures are presented with Flash®; the software to view these figures is available at Adobe's web site.
PHOENIX -- There always is a rabid sense of the underdog at the Independent Community Bankers of America annual convention, where lenders from throughout the U.S. meet, many clad in shorts and golf shirts.
Bloomberg News
Fed Chairman Ben Bernanke and FDIC Chairman Sheila Bair, below, both spoke at the Independent Community Bankers of America conference Friday, and were the target of many attendees' ire.
But when Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair arrived here Friday, they encountered an unusually feisty crowd: roughly 1,000 bankers were steaming mad about the financial crisis.
At panel discussions and in the halls of the Phoenix Convention Center, some bankers joked that Ms. Bair and other FDIC officials at the conference ought to wear bulletproof vests.
In a cavernous room where financial companies were hawking various services and technological gizmos, one vendor handed out small foam-rubber figurines of Mr. Bernanke, next to a sign that said: "Stressed out? Give Ben a squeeze."
Associated Press
A small Ben Bernanke doll was handed out to convention attendees during the Independent Community Bankers of America National Convention and Techworld gathering.
Nearby, Charles D. Rogers, senior vice president at Tennessee Commerce Bank, passed out pink foam pigs that he said were meant for the "folks on Wall Street."
Few of the bankers here ventured into subprime mortgages, instead carving out reliable niches such as catering to local businesses. These banks lacked the capital-markets operations that churned out the financial exotica now pummeling many financial firms.
Of the roughly 8,300 federally insured banks in the U.S., more than 8,000 are community banks. Relatively few of them have pocketed taxpayer capital through the Treasury Department's Troubled Asset Relief Program.
Among the bankers gathered in Phoenix, the No. 1 bogeyman is Citigroup Inc. A close second is Ms. Bair, whose plan to levy higher fees on banks to pay for the deposit-insurance system threatens to erode small-bank profits and capital cushions.
Bloomberg News
Sheila Bair
Giant banks like Citigroup "have tarred and feathered us," said Bill McQuillan, chief executive of City National Bank in Greeley, Neb. A Citigroup spokeswoman declined to comment.
The mood at the conference was angry, reflecting the industry's frail state overall and the guilt by association that community bankers are dealing with as larger rivals wobble.
Local lenders are in relatively strong shape. More than 95% of the nation's community banks were well-capitalized at the end of last year, Mr. Bernanke said Friday.
Still, most of the 42 banks that have failed since the start of last year were community institutions. Many are getting burned by loans to finance real-estate development and construction projects that have gone belly up since housing markets collapsed.
Mr. Bernanke and Ms. Bair knew what they were walking into. Ms. Bair, for one, arrived at the convention center flanked by a government security detail.
"It's nice to be back in America," the Fed chairman said after taking the stage, his gray suit and blue tie making him appear much more pleasant than the villainous squeeze toy that he inspired. "No doubt this frustration has been heightened by the problems caused by financial firms that are too big or too interconnected to fail," Mr. Bernanke said.
Mr. Bernanke was greeted with a standing ovation. In contrast, Ms. Bair got lukewarm applause when she walked onto the stage. But the audience roared its approval every time she spoke of the need to clamp down on the nation's megabanks, saying the government should impose higher capital requirements and tougher penalties to discourage banks from becoming too big.
"It shouldn't be rewarded," she said. "It should be penalized." She added that the government needs to "get these institutions to downsize." Rigorous cheers erupted -- and after the speech, she had won over some skeptics.
"She does recognize the difference between the too-big-to-fail banks and the community banks," said Allie Knoll, president of Stratford State Bank in Wisconsin, wearing a bright yellow Hawaiian shirt. "I think the overall reception here was fairly positive."
As Ms. Bair sat in the lobby of a nearby hotel later Friday, Shawn Davis, CEO of Carlinville National Bank, told Ms. Bair that his Carlinville, Ill., bank had recently acquired a failed bank from the FDIC in February. "We always hear bad things" about the FDIC, Mr. Davis said, but "I just have to say your staff is great."
In an interview, Ms. Bair said the FDIC has been working hard to assuage the concerns of community bankers. "There's pain in this," she said. "We're listening. We're working to reduce it and make sure the pain is equitable."
Jan. 23 (Bloomberg) -- Matthew Stubbs said the mortgage choice was easy when he bought his Seattle dream home: Pay less than 6 percent to locally based HomeStreet Bank, or a percentage point higher and $3,400 extra in fees to Wells Fargo & Co.
“The differences were so pronounced that there was no question when it came to the final decision,” Stubbs, 31, who closed in November on a three-bedroom house in the Beacon Hill neighborhood, near Seattle’s new light rail line and Amazon.com Inc.’s headquarters, said in an interview.
Small banks with little or no exposure to the toxic debt that crippled Wall Street have money to lend as U.S. homebuyers struggle to find credit( GOOD NEWS ). While the largest lenders retrenched in the third quarter, loan volume for institutions with less than $1 billion in assets rose 6.8 percent, according to Pacific Coast Bankers’ Bank, a San Francisco-based trade group. Barry James, chief executive officer of James Investment Research Inc. in Xenia, Ohio, says that trend will continue.( GOOD )
“There’s some real strength in these smaller institutions that didn’t get in trouble,” said James, whose $650 million Golden Rainbow Fund owns community bank shares and has beaten 99 percent of its competitors over the past five years, according to Bloomberg data. “They are picking up business.”( GOOD )
HomeStreet Bank increased its residential mortgage business by 13 percent in the third quarter from a year earlier, according to a Federal Deposit Insurance Corp. filing. Meanwhile the largest national banks, including New York-based JPMorgan Chase & Co. and Citigroup Inc. and Charlotte, North Carolina-based Bank of America Corp., curtailed mortgage lending amid the industry’s $1 trillion in credit losses and writedowns.
A Local Advantage
“No longer do nationwide lenders or investors want to just pick up business 3,000 miles away, because they’re so concerned about risk,” Guy Cecala, publisher of Inside Mortgage Finance, a Bethesda, Maryland-based newsletter, said in an interview. “That’s the real advantage a community bank has. They effectively know everybody in the neighborhood, or all their customers.”( VERY GOOD NEWS )
Stubbs, who works for the Seattle City Light public utility and has an above-average credit score of 760 in a scale developed by Fair Isaac Corp., said his first contact with Wells Fargo came in a phone call with an agent in Anchorage, Alaska. By contrast, he spoke to a HomeStreet loan officer who lives in Seattle and had also bought property in the area.
“It seemed that he understood the local housing market and knew the neighborhood, which is something that isn’t captured in the standard risk profiling( YES ),” said Stubbs, who bought the house for $340,000 with his girlfriend, a graduate student.
Mortgage Applications
In November, the month Stubbs completed his purchase, U.S. mortgage applications fell to an eight-year low as housing prices tumbled. Applications picked up in December, when lower mortgage rates encouraged homeowners to refinance. The top five lenders slashed mortgage originations by 50 percent over the course of a year, according to New York-based analyst Meredith Whitney at Oppenheimer & Co.
Countrywide Financial Corp. and Washington Mutual Inc. cut residential lending before they were purchased last year by Bank of America and JPMorgan, respectively. The same was true for Wachovia Corp., acquired by San Francisco-based Wells Fargo on Jan. 1. Even Wells Fargo, which has weathered the housing crisis better than its competitors, reported a $10 billion drop in third-quarter mortgage originations from the previous quarter.
JPMorgan originated $28.1 billion in mortgages during the fourth-quarter, a 30 percent decrease from the previous year’s period. Home equity originations dropped 83 percent from the previous year to $1.7 billion in originations.
Shares Surge
When Deborah Parsons refinanced her Topeka, Kansas, home last year, she opted against Countrywide, her mortgage company for more than a decade. Instead, Parsons turned to Capitol Federal Financial, a local bank she sees daily on her drive to work.
Parsons closed the $80,000 loan in December, and now can reach a local bank representative near her home, instead of relying on the toll free number that appeared on her Countrywide bill.
“Customer service was the biggest part and just knowing their reputation,” said Parsons, 45, who refinanced so she and her husband could buy new windows and upgrade their air and heating systems. “We see their commercials, see them on the street corners.”
Capitol Federal shares have surged 38 percent in the past year, the best performance in the 495-company Nasdaq Bank Index, while Wells Fargo, Citigroup, Bank of America and JPMorgan each have fallen by at least 40 percent.
‘Aggressive’ Banks
National banks( BANKS THAT WERE COUNTING ON GOVERNMENT GUARANTEES ) that financed the U.S. housing boom “got very aggressive,” lowering interest rates for home loans, offering adjustable-rate products to subprime borrowers and selling bundled mortgages in the secondary market, said Steve Brown, chief executive officer of Pacific Coast Bankers’ Bank, which was formed in 1997 and counts more than 200 community banks as shareholders across the U.S.
“It got so tight that community banks couldn’t stand in the space any more,” Brown said. “Now the pendulum is swinging the other way. A small banker can look a customer in the eye, shake their hand and know them better. You’re not working with models and prices set in New York.”
That’s become a familiar story to John Dicus, chief executive of Capitol Federal. The bank’s market share of single- family mortgages in Kansas City, about 60 miles from Topeka, fell to 10 percent in mid-2008 from about 20 percent five years ago, when competitors offered subprime loans to the riskiest customers and Alt-A mortgages that didn’t require proof of income, Dicus said.
No Subprime Backlash
Capitol Federal, with a default rate one-seventh the average of the top 10 U.S. banks, lost business because it wouldn’t lower its credit standards( DO YOU SEE THAT IT WASN'T MANDATORY OR MECHANICAL? ). Now it’s benefiting.
Profit for the fiscal year ended Sept. 30 jumped 58 percent and only a quarter of one percent of loans is delinquent. The lender’s market share is up to 12 percent and opportunities continue to arise, Dicus said.
“We haven’t been adversely affected through the subprime and Alt-A meltdown,” Dicus said in an interview. “The smaller banks, the ones that have been successful through this, will play a big part in bringing us out of it.”( YES )
Hudson City Bancorp., a Paramus, New Jersey-based home lender, said Jan. 21 that fourth-quarter profit climbed 60 percent, bolstered by increased mortgage originations. The stock has dropped 17 percent in the past year, compared with the 66 percent slump in the 24-member KBW Bank Index.
More Growth
“The reduced number of lenders will continue to fuel our mortgage growth,” said CEO Ronald Hermance, in a statement.
Capitol Federal and Hudson City hold most of their loans rather than sell them. Banks that sell their mortgages in the secondary market have been hurt because investors that buy bundled loans are only purchasing securities backed by the government( YES ). Those accounted for 99 percent of issuances in the first nine months of 2008, according to newsletter Inside MBS & ABS.
To reignite lending, the U.S. government has poured more than $200 billion into banks through the Troubled Asset Relief Program, a $700 billion fund approved by Congress in October.
Community Bank System Inc. opted not to apply for TARP because it had plenty of capital, the DeWitt, New York-based company said in November. Today, the bank said it boosted consumer mortgage lending by 8.7 percent in the fourth quarter from a year earlier. The stock has dropped 12 percent in the past year.
Big Banks
As smaller banks increase lending and add market share, the biggest institutions aren’t losing their dominance. Citigroup, JPMorgan, Bank of America and Wells Fargo accounted for two- thirds of U.S. mortgages last year, said Cecala of Inside Mortgage Finance.
Companies in the Nasdaq Bank Index had total loan portfolios of $1 trillion at the end of the third quarter, according to Bloomberg data. The four biggest lenders had 3.5 times that amount, led by Bank of America with $1.1 trillion, which included loans made by Countrywide and Merrill Lynch & Co.
The average market capitalization of banks in the Nasdaq group is $251 million, while the top four U.S. banks are each worth an average of $52 billion.
Still, John Koelmel says his small bank in upstate New York, First Niagara Financial Group Inc., is finding more opportunities than ever and plans to expand lending in the next two to three years.( GOOD )
Adding Customers
The shares have jumped 22 percent in the past year and the lender has added customers including small businesses, real estate firms and home owners as bigger competitors like HSBC Holdings Plc and Bank of America scale back in the region, he said.
“It’s abundantly clear to us that they’re not pulling back temporarily, they’re retrenching for the longer term,” said Koelmel, 56, from his company’s headquarters in Lockport, New York. “That’s created and translated into meaningful opportunities for us. It continues to open doors for us everyday.”( GOOD )
If people did not sometimes do silly things, nothing intelligent would ever get done.
Frazer's account of the magical and religious views of mankind is unsatisfactory; it makes these views look like errors.
Are you not really a behaviourist in disguise? Aren't you at bottom really saying that everything except human behaviour is a fiction?" — If I do speak of a fiction, then it is of a grammatical fiction
Could one imagine a stone's having consciousness? And if anyone can do so—why should that not merely prove that such image-mongery is of no interest to us?
An 'inner process' stands in need of outward criteria
For a large class of cases--though not for all--in which we employ the word "meaning" it can be defined thus: the meaning of a word is its use in the language.
What Copernicus really achieved was not the discovery of a true theory but of a fertile new point of view.
mathematics is a motley of techniques and proofs.
Everything that can be said, can be said clearly.
Whenever he does anything, this is before his mind. In a way, how are we to know whether to say he believes this will happen or not?
Asking him is not enough. He will probably say he has proof. But he has what you might call an unshakeable belief. It will show, not by reasoning or by appeal to ordinary grounds for belief, but rather by regulating for in all his life
I did not get my picture of the world by satisfying myself of its correctness; nor do I have it because I am satisfied of its correctness. No: it is the inherited background against which I distinguish between true and false.
All testing, all confirmation and disconfirmation of a hypothesis takes place already within a system. And this system is not a more or less arbitrary and doubtful point of departure for all our arguments; no it belongs to the essence of what we call an argument. The system is not so much the point of departure, as the element in which our arguments have their life.
What I hold fast to is not one proposition but a nest of propositions.
At the core of all well-founded belief, lies belief that is unfounded.
Knowledge is in the end based on acknowledgement.
At the end of reasons comes persuasion.
Nothing is so difficult as not deceiving oneself.
The way you use the word "God" does not show whom you mean — but, rather, what you mean.
One can mistrust one's own senses, but not one's own belief. If there were a verb meaning "to believe falsely," it would not have any significant first person, present indicative.
What has to be accepted, the given, is — so one could say — forms of life.
If a lion could talk, we could not understand him.
An entire mythology is stored within our language.
There are, indeed, things that cannot be put into words. They make themselves manifest. They are what is mystical.
Scepticism is not irrefutable, but obviously nonsensical, when it tries to raise doubts where no questions can be asked. For doubt can exist only where a question exists, a question only where an answer exists, and an answer only where something can be said.
The mystical is not how the world is, but that it is.
The subject does not belong to the world, but it is a limit of the world.
It is quite impossible for a proposition to state that it itself is true.
What do I know about God and the purpose of life? I know that this world exists. That I am placed in it like my eye in its visual field. That something about it is problematic, which we call its meaning. This meaning does not lie in it but outside of it. That life is the world. That my will penetrates the world. That my will is good or evil. Therefore that good and evil are somehow connected with the meaning of the world. The meaning of life, i.e. the meaning of the world, we can call God. And connect with this the comparison of God to a father. To pray is to think about the meaning of life.
Make sure that your religion is a matter between you and God only.
La Bête: Mon cœur est bon, mais je suis un monstre.
You can never plan the future by the past.
We must all obey the great law of change. It is the most powerful law of nature, and the means perhaps of its conservation.
Economy is a distributive virtue, and consists not in saving but selection. Parsimony requires no providence, no sagacity, no powers of combination, no comparison, no judgment.
A very great part of the mischiefs that vex the world arises from words.
It is the nature of all greatness not to be exact.
The march of the human mind is slow.
Liberty, too, must be limited in order to be possessed.
If any ask me what a free Government is, I answer, that, for any practical purpose, it is what the people think so, — and that they, and not I, are the natural, lawful, and competent judges of this matter.
A state without the means of some change is without the means of its conservation.
Better to be despised for too anxious apprehensions, than ruined by too confident a security.
Our patience will achieve more than our force.
Politics and the pulpit are terms that have little agreement.
All government, indeed every human benefit and enjoyment, every virtue, and every prudent act, is founded on compromise and barter we give and take; we remit some rights, that we may enjoy others
It is one of the finest problems in legislation, What the state ought to take upon itself to direct and what it ought to leave, with as little interference as possible, to individual discretion.
History is a preceptor of prudence, not of principles.
No rational man ever did govern himself, by abstractions and universals.
I always distinguish between a man's talkative and writative character.
A revolution will be the very last resource of the thinking and the good.
... all that wise men ever aim at is to keep things from coming to the worst. Those who expect perfect reformations, either deceive or are deceived miserably.
Man acts from motives relative to his interests; and not on metaphysical speculations.
Before men can transact any affair, they must have a common language to speak otherwise all is cross-purpose and confusion.
We owe an implicit reverence to all the institutions of our ancestors.
You may talk of the tyranny of Nero and Tiberius; but the real tyranny is the tyranny of your next-door neighbor... Public opinion is a permeating influence, and it exacts obedience to itself; it requires us to think other men's thoughts, to speak other men's words, to follow other men's habits.
It is good to be without vices, but it is not good to be without temptations.
Why should it not be the whole function of a word to denote many things?
It may justly be urged that, properly speaking, what alone has meaning is a sentence
We become obsessed with 'truth' when discussing statements, just as we become obsessed with 'freedom' when discussing conduct...Like freedom, truth is a bare minimum or an illusory ideal
Like 'real', 'free' is only used to rule out the suggestion of some or all of its recognized antitheses. As 'truth' is not a name of a characteristic of assertions, so 'freedom' is not a name for a characteristic of actions, but the name of a dimension in which actions are assessed.
[O]rdinary language is not the last word: in principle it can everywhere be supplemented and improved upon and superseded. Only remember, it is the first word.
...our common stock of words embodies all the distinctions men have found worth drawing, and the connections they have found worth marking, in the lifetime of many generations: these surely are likely to be more numerous, more sound, since they have stood up to the long test of survival of the fittest, and more subtle, at least in all ordinary and reasonable practical matters, than any that you or I are likely to think up in our armchair of an afternoon – the most favorite alternative method.
The situation in which I would properly be said to have evidence for the statement that some animal is a pig is that, for example, in which the beast itself is not actually on view, but I can see plenty of pig-like marks on the ground outside its retreat. If I find a few buckets of pig-food, that's a bit more evidence, and the noises and the smell may provide better evidence still. But if the animal then emerges and stands there plainly in view, there is no longer any question of collecting evidence; its coming into view doesn't provide me with more evidence that it's a pig, I can now just see that it is.
Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance—where, in short, we deal with genuinely insurable risks—the case for the state’s helping to organize a comprehensive system of social insurance is very strong.
"Adam Smith's Recommendations on Taxationby Nadia Weiner, Director of the Adam Smith Club of Sydney, Australia
Although Adam Smith is often quoted, the so-called "Father of Economics" has rarely been read, either by his detractors or his admirers. Consequently he is often misunderstood.
Smith, who made such a strong stand against the protectionist mercantile system of trade of his day, devoted over ONE THIRD of his masterpiece An Inquiry into the Nature and Causes of the Wealth of Nations, to discussing the subject of government revenue and the methods by which it may be best collected, including new taxes. This is not generally known.
When examining the different forms of taxation, Smith adheres to four maxims which a good tax should conform to:
1. "The subject of every State ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State."
2. "The tax each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid, ought all to be clear and plain to the contributor, and to ever other person."
3. "Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it."
4. "Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the State."
Bearing all these things in mind, there are two types of taxation which obtain Smith's recommendations: a tax on luxury consumables and a tax on ground-rents (the annual value of holding a piece of land).
On the subject of luxury consumables, he is adamant about the definiton of 'luxury' and of 'necessary.' By his definition, a 'necessary' may vary from place to place and from time to time. At the time of his writing, linen shirts, leather shoes and a minimum of food and shelter were definitely to be regarded as essential to a minumum decent standard of living. Taxes on salt, soap, etc., he harshly criticized as inequitably taking from the poorest elements of society. Taxes on luxuries, which were to include tobacco, he considered excellent in that no one is obliged to contribute to the tax: "Taxes upon luxuries have no tendency to raise the price of any other commodities except that of the commodities taxed ... Taxes upon luxuries are finally paid by the consumers of the commodities taxed, without any retribution."
More deserving of priase is the tax on ground-rents: "Both ground- rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land are, therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them."
Excise, customs, taxes on profits, were, according to Smith, either expensive to collect, as in the case of excise, or disincentives to produce, as in the tax on profits. He reserves harsh words for taxes which occasion the invasion of privacy, and on the subject of excise he says: "To subject every private family to the odious visits and examination of the tax-gatherers ... would be altogether inconsistent with liberty."
The harshest condemnation of all, however, was for taxes upon labour: "In all cases, a direct tax upon the wages of labour must, in the long run, occasion both a greater reduction in the rent of land, and a greater rise in the price of manufactured goods, than would have followed from a proper assessment of a sum equal to the produce of the tax, [levied] partly upon the rent of land, and partly upon consumable comodities."
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The beginning of the end
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borrowed wisdom is still wisdomGreetings readers!
After 10 years, I am going to stop blogging at aguanomics.
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[image: Cardboard Boxes on a trolley]
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Stephanomics is dead. Long live Stephanomics. Today's news is that this
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...
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Some Links
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(Don Boudreaux) TweetWriting in the Wall Street Journal, NYU physicist
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I've been thinking about this for some time.
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Historic Chart of the Day
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Based on today's Census Bureau report on April retail sales, consumer
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Michael Lewis breaks news from 2008
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Michael Lewis, of Liar's Poker fame, has emerged as a leading writer of the
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From Bloomberg News:
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Banking services form the backbone of the world’s financial system. At the
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For a few months now, we've been sayin...
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Oil Prices Jump as U.S. and Iran Exchange Fire An LNG Glut Is On Its Way
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High image quality, bring your ideas to life save pdf smaller size mac
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Although the de...
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I...
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Invitation to connect on LinkedIn
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LinkedIn
Emre,
I'd like to add you to my professional network on LinkedIn.
- Emre
Emre Deliveli
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Moving on
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*A Trend Model Status Report*
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Speaking trip this April
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I'm speaking at Libertycon in Tbilisi on April 20th, will probably either
go or come via London. Anyone interested in a talk? I'll probably be in
Europe ...
Incentives Matter, Indeed
-
Friend Ennyman rights a great piece on the role of incentives, here's the
conclusion: "Whether it's meeting deadlines, forming good habits in our
children ...
InfoVis vs. i|e
-
People have set out varying hopes and interpretations for the term
“Information Aesthetics,” and they mostly differ from what this
organization was creat...
China has much to teach us. John Roberts does not.
-
So, I don’t really write here any more. I write at drafts.interfluidity.com
instead. Please follow that feed or subscribe by e-mail. I do still offer
perio...
Byron Wien Announces “The Ten Surprises” for 2013
-
Byron Wien, Vice Chairman of Blackstone Advisory Partners, yesterday issued
his list of “The Ten Surprises for 2013″. This is the 28th year Byron has
given...
Residential Roofing Choices For Flat Roofs
-
There are a lot of different types of residential roofing material
available for residential units. Some are more common than others and some
are cheaper...
herbal untuk jantung dan darah tinggi yang ampuh
-
Apakah Anda tahu bahwa madu mampu memberikan M segala macam manfaat bagi kesehatan
manusia? Madu diakui mengingat bahwa zaman kuno sebagai obat, dan penggun...
Obama’s vague Buffett Rule a political ploy
-
A few thoughts on the economics and politics of President Obama’s
tax-the-rich “Buffett Rule” and new debt reduction “plan”: 1) What problem
does the Buffe...
This blog has moved
-
To a new blog-support vendor. You can read the latest posts by clicking
here. If you're a regular reader, thank you and please update your
favorites to the...
The Surface: I Came, I Saw, I Left
-
I went to the Microsoft store in Times Square yesterday to see for myself
the new Surface tablet with the spiffy keyboard, since nobody I know
actually ...
Financial Markets Will Move To Asia
-
Chicago, they invented the Soybean futures contracts. But now, China uses
more soybeans than ... *READ THE REST OF THE ARTICLE ON THE NEW WEBSITE:
JIM ROGE...
The US Navy just lost another war
-
… but that won’t change any minds It’s now six months since the US-Israel
war on Iran began with air attacks which killed the Iranian leader
Ayatollah Kham...
A CryptoFiction
-
Here’s a micro-story I started with the Access Crypto Summit flash fiction
prompt in mind, left half done, and then belatedly finished off anyway,
because ...
Comment perdre du ventre ?
-
Une brioche, voici le nom que l’on donne au ventre lorsqu’il est un peu
trop rond. « On pourrait presque le pétrir avec les mains, un peu comme on
prépare ...
Multiplication of unlawful disjunctions
-
Charles B. writes: Apparently, birds are not considered wild animals by
law. Reference here, where apparently feeding them in parks in permitted
except if ...
Somaliland in the Great Game
-
The small self-proclaimed state of Somaliland is aiming to become a
regional player: it is now an ally of Israel and has commercial and
security agreemen...
-
*above: While Menzies was far from without fault, on many issues today's
Liberal Party would be unrecognizable for him. *
*Dr Tristan Ewins*
Much ...
Let a Thousand New Green Deals Bloom
-
I write that “[a] decentralized ecological approach would recognize that
managing emissions is one part of a larger equation that includes the
natural carb...
Clinton’s Lost Votes
-
https://www.facebook.com/rchusid/posts/2670987959585088 Establishment
Democrats love to blame third party voters for Clinton losing, but The New
York Times...
Awaiting my execution: A letter from Iran
-
BREAKING: Saman Naseem’s execution did not go ahead as originally scheduled
on the morning of Thursday 19 February. More information to come. Saman
remains...
Allan Meltzer's Life Work
-
The Hoover Press and the Mercatus Center have just released a new book on
Allan Meltzer's contributions to economics. The book is comprised of papers
th...
The Argentina Siren Song And Where Else It Is Sung
-
I’m back! After an extended leave of absence I’ve decided to start writing
again.
Let’s start with a story familiar to those that read MM in my first ter...
Do Higher Wages Mean Higher Standards of Living?
-
Editor's note: We have updated macroblog's location on our website,
although archival posts will remain at their original location. Readers who
use RSS sho...
The End
-
I started this blog back in 2008. What a ride it's been! Thanks to all who
took the time to interact with me -- I profited greatly from the
experience. And...
Downright intuitive and comical
-
I was on my hands and knees yesterday scrubbing a LOT of blood off a tennis
court. And yes, we won. Note to friends - my tennis is not that good, but,
I am...
Mein Ingeborg Bachmann Studium
-
Recently I finished read Malina, by Ingeborg Bachmann, an Austrian novel
published in 1971. I was pretty stunned by how good it was (it seems less
good ...
Exhibition: Man's Inhumanity to Man
-
[ Meanwhile... in Guatemala - Mark Vallen. 1988. Pencil on paper 10" x 14".
On view at Man's Inhumanity to Man. Military death squads were responsible
for ...
Adjust contrast of a pdf free
-
Closer to the eye of the shooter, this is because Preview is quite
literally applying a filter to each individual page of the PDF you are
saving. the proce...
Recovering ancient voices from clay pots
-
MIT reports recovering voices from high-frame-rate video of a potato-chip
bag, extracting information from vibrational displacements as small as
1/100 of a...
The Biggest Bubble Isn’t AI — It’s Government Debt
-
Mario Innecco speaks with Dr. Mark Thornton, Senior Fellow at the Mises
Institute, about the growing risks facing the global economy. We discuss
the end of...
Bond vigilantes call for “Day of Rates”
-
Flustered by the obstinate refusal of US interest rates to move up, bond
vigilantes are resorting to the revolutionary tactic *du jour*: Twitter!
In a thr...
Big D Has Your Rivalries Right Here
-
Editor's Note--Well that wasn't how we like it last week. 2-4. But this
week is rivalry week in the college where you throw out the records and
teams play ...
Goodbye and Hello from New Geography
-
Dear Readers:
After 17 years we are closing New Geography.com.
You'll now find Joel Kotkin's articles on his new Substack page,
jkotkin.substack.com, wh...
Rebecca Wilder is moving to the EconoMonitors
-
I've decided to migrate News N Economics over to my new blog, The Wilder
View, on the Roubini EconoMonitors platform.
Really, I jumped at the opportunity t...
Monday Morning Readings
-
I've really been slacking on the posting lately. The must read:
July Economic Data Summary
Recommended:
Turning Dumpsters Into Swimming Pools
A Simple Expl...
We’ve moved to www.nudges.org. Come with us.
-
Nudges.wordpress.com has been a great home for the Nudge blog over the past
year and a half, but it’s time to move on. Where to? www.nudges.org. That’s
rig...
What to do?
-
by liberal japonicus from
https://everything.typepad.com/blog/2025/08/typepad-is-shutting-down.html
Typepad is shutting down August 27, 2025 We have made t...
For a sense of proportion: datacentre water use
-
I like this chart, from Andreas Heuser and Phil Whittington's excellent
piece making the case for datacentres.
Nobody has a sense of perspective on ind...
Disclosure Seems Unlikely
-
Many who hold the plausible belief that some UFOs are caused by strange
strong (“alien”) powers now believe that the US (and maybe other) govts
have long b...
Strong US Jobs Report Reignites Rate Hike Fears
-
Sean Conlon, Lee Ying Shan, Ananya Chetia and Chloe Taylor of CNBC report
the Dow tumbles more than 260 points after strong jobs report reignites
rate hik...
PFM Blog announcement: we are moving!
-
iStock.com/tumsasedgars Posted by Teresa Curristine, Holger van Eden, and
Richard Allen DEAR PFM BLOG USERS – The PFM Blog will be transferring to a
brand ...
To Save America’s Cities, We Need to Let Them Fail
-
Downtown Los Angeles
America's flagship cities have become laboratory experiments for social
justice. Heavily controlled by political leaders who subscri...
Inside Bright Star
-
Read about Jane Campion's film Bright Star, chronicling the love affair
between John Keat and his neighbor Fanny Brawne, as well as the poems and
love lett...
COOPERATION IS PROFITABLE
-
part of my new - ELITE MANAGEMENT THEORY series
Personal interests are paramount – most important.
The smaller the cooperating group is the better it refle...
How Developing Countries Can Do More With Less
-
Evaluation frameworks for development projects have long been influenced by
donor priorities. But foreign-aid cuts have created an opportunity for
Africa...
The Bailout: By The Actual Numbers
-
by Paul Kiel
Quick, how many billions in the red are taxpayers on the bailout of GM?
AIG? Fannie and Freddie? Is it true that the government has reaped ...
A rethink on the Middle East
-
Below is an oped I have in today's Boston Globe.Middle East peace policy
has tanked, despite a flurry of diplomatic activity to block out that
reality. The...
Check Out The New Quantifiable Edges!
-
Quantifiable Edges has undergone a complete site overhaul! Part of that
overhaul included moving the blog. New posts can be found at the address
below:
h...
Printable Bookmarks With Quotes
-
Creative Handmade Bookmarks Design With Quotes – Google Search with regard
to Printable Bookmarks With Quotes Printable Bookmarks With Quotes | Second
Star...
Unforced Variations: Sep 2026
-
This month’s open thread on climate topics. Please be constructive and keep
nonsense to a minimum.
The post Unforced Variations: Sep 2026 first appeared ...
Another Bad Critique of AI, in the New York Times
-
Want to get your uninformed opinion about AI published in the most
prestigious newspaper in the United States? Then follow my advice.
First, it helps if y...
The World Cup and Making Soccer Less Boring
-
It is World Cup time, a good time to reintroduce two posts I did one of the
last times we had the World Cup capture the imagination. One of them
suggests ...
Banking fraud - is dishonesty the new greed?
-
It has not been a good month for the financial industry: JPM's ever growing
CDS trading (and apparently mismarking) loss; PFG Best's appreciation for
Adobe...
Does Death Exist? New Theory Says ‘No’
-
Many of us fear death. We believe in death because we have been told we
will die. We associate ourselves with the body, and we know that bodies
die. But ...
When Do Consumer Boycotts Work?
-
Uber, Starbucks, Budweiser. These are just a few of the brands that have
faced consumer boycotts for taking supposedly political stances in the past
few ...
“Goodnight, and Good Luck”
-
My February 2016 valedictory editorial note on the home page of Al Jazeera
America the day we closed down. Still proud of the work we did, and the way
we c...
Moved Over
-
I’ve been blogging away over at my new blog at Next New Deal, come join me
over there! Here’s the new rss feed. I might post here once in a great
while, m...
Carolina Wolf: Carolina Wolves, #1
-
All it takes is a spark of Grrrrl power to set the swamp on fire! Debra
Henry is living the meek librarian cliche, except for the teeny hint of
magic in h...
Prediction Markets and the Kelly Criterion, Part 5
-
Perhaps the most famous proponent of the Kelly Criterion is Edward Thorp.
He founded the M.I.T. Blackjack Club, published various papers on gambling
and ...
The paradox of insular language
-
We often develop slang or codewords to keep the others from understanding
what we’re saying. Here’s an example (thanks BK) of the lengths that some
are goi...
Flash Commentary No, 1460b
-
• Fundamentals Could Not Be Stronger for Gold and Silver, nor Weaker for
the U.S. Dollar and Stocks, Despite Fed or Market Nonsense to the Contrary
• There...
If something can't go on forever, it will stop
-
This is my last post at/as Shock Minus Control. As I mentioned in my
December post, my youngest son (now 7 months) had a congenital heart defect
repaired a...
Goldman Sachs comes late to the game
-
The Financial Times ran a story Monday about Goldman Sachs becoming the
first big dealer to orient its business around electronic fixed-income
trading and ...
Whoop!
-
That is the sound of the gravitational waves hitting the LIGO detector. A
chirp. That is also the sound of the celebratory hurrah’s from the gravity
commun...
LLMs and self-referentiality
-
I woke up yesterday with the following thoughts, which are probably either
obvious or dumb. A central thesis that many readers, including me, took
from Dou...
test
-
“Virtual worlds are going to be one of the first killer apps for
blockchains and perhaps the deepest users of them.” – Fred Ehrsam,
Co-Founder, Coinbase ...
Muni Madness
-
"Investors are ignoring warning signs in the $2.8 trillion municipal-bond
market, raising the risk of a reckoning, according to some market
specialists. Nu...
The politics of the General Will in Thailand
-
Excerpts from Cultural policy as general will and social-order
protectionism: Thailand’s conservative double movement Michael K. Connors
International Jour...
2026 NYU Tax Policy Colloquium
-
Here is the schedule of public sessions at the fall 2026 NYU Tax Policy
Colloquium:
*2026 NYU TAX POLICY COLLOQUIUM SPEAKER DATES*
All sessions meet on ...
Thatcherism is dead: Thatcherism lives
-
Thatcherism is dead. It has ceased to be. It has expired and gone to meet
its maker. It has kicked the bucket, shuffled off this mortal coil and
joined the...
The Gulf's Other Product
-
We all know that the Gulf exports massive amounts of crude oil, refined
products, LNG, fertilizer, helium, aluminum - and they all have to pass
through ...
Deepseek gets F+ in Econ
-
LLMs have trouble with this pretty-basic economics question:
Prompt: “*Is this factually accurate?*
*Positively correlated price-quantity pairs reveal th...
Announcement
-
So it is with some sadness that I have to announce that I’m going to be
leaving True/Slant. Starting in a few days I will be back blogging
exclusively at w...
Update: A Tax Compromise Offered in Illinois
-
Earlier this month I highlighted a potential tax compromise brewing in
Illinois. State senate Republicans and Democrats released a proposal to
increase I...
10 Seconds Into The Future
-
The low inflation and low interest rate environment that we experienced in
the last 20 years was only possible as inflation was exported away to low
cost p...
Issues Associated with the Current Election
-
Picture Credit: derek visser (modified to exclude extraneous comments) ||
Trump and Harris are more similar than different. Both favor the rich, they
lie, ...
Help wanted: incrementalist systems builder
-
a.k.a Toolsmith a.k.a. Geek To help forecast a hot CE product in one of the
world’s largest retailers (located in Seattle). Apply within.
‘If she killed my girl she must die’
-
An Australian woman charged with poisoning her friend must be executed if
found guilty, says the victim’s father.
A Few Quick Announcements
-
By James As I wrote a couple of years ago, I don’t post here anymore. I
just have a couple of updates for people who subscribe and may be
interested in my ...
RTO Gets Serious: October 1
-
If ever a week was ripe for delaying your return to the office, it was
this one. Hurricane Idalia cleared out the weather up and down the coast,
brin...
Re: Something I’ve written on the demand filter?
-
On Wed, Oct 1, 2025 at 4:43 PM ivan invernizzi wrote: Hi Warren, You first
mentioned this to me in 2015, while we were driving on the highway between
Mil...
Is my pessimism justified?
-
I'm increasingly pessimistic about prospects for meaningful reform in the
wake of the financial crisis, and feel that a repeat, quite possibly on an
even l...
The Years Of Writing Dangerously
-
Thirteen years ago, as I was starting to experiment with this blogging
thing, I wrote the following: [T]he speed with which an idea in your head
reaches th...
Occupy Wall Street - Marine vs 30 Cops
-
Speaking of the police. Here is a link to a video of a soldier - in uniform
- protesting the treatment of demonstrators by the police.
http://perezhilton....
England Expects (note on Dunkirk)
-
First of all, let nobody say Christopher Nolan lacks a sense of humor: for
the second time, he’s kept Tom Hardy under a voice-distorting face mask for
almo...
Uncle Warren Explains It All to You
-
[image: Time for Daddy’s little dividend]
*“Sure, sure.”*
— Sidney J. Mussburger, *The Hudsucker Proxy*
Apparently some doddering old fart in Omaha, Nebr...
Low Volume Melt Up
-
*FN:* On the way down there is volume. On the way up, there is less...
waaaay less (especially for this time of the year).
Can you say algos?
So what does...
Goodbye Scienceblogs
-
Goodbye Scienceblogs
NOTE: This blog has moved. The Frontal Cortex is now over here.
I've got some exciting news: Starting today, the Frontal Cortex will ...
US Continuing Jobless Claims Fall by 3.86M
-
Continuing Jobless Claims in the United States decreased significantly last
week to 21,052,000 from a record high of 24,912,000 in the previous week.
The n...
Penny Stock Research Sources
-
Penny Stock Research Sources Just because you don’t hear about penny
stocks every day on your daily news, doesn’t mean that the penny
stock market goes wit...
Hello world!
-
Welcome to WordPress. This is your first post. Edit or delete it, then
start writing!
The post Hello world! appeared first on My WordPress.
Moving Just A Click Away
-
Tomorrow I’ll be starting to blog at National Geographic Magazine, along
with Ed Yong, Virginia Hughes, and Brian Switek. All the archives of the
Loom (f...
The Market Ticker - The Pattern of The Market
-
*Looks awfully similar to 2008.*
*Rotation back and forth, with most of the gains coming in a handful of big
names with big stories -- but no earnings to...
Arguing with Children
-
The other day the New York Times ran an op-ed about Greta Thunberg, the
teenage environmental activist. The TL;DR is that activism, particularly
the activi...
The Oil Drum writers: Where are they now?
-
- Nate Hagens is at The Monkey Trap
- JoulesBurn (Brian Maschhoff) is at Picojoule
- Euan Mearns is at Energy Matters
- Heading Out (Dave...
Mom Has Stacked Dinner Party Roster
-
GOLDEN, CO—Their eyes widening in amazement as the 43-year-old rattled off
the names of heavy hitter after heavy hitter, impressed members of the
Dreesh...
An Autopsy of American Exceptionalism
-
I’m writing this in a Parisian cafe in the year 2050. I’m doing a reverse
Hemingway, trying to become a better writer as I get into my 70s while I [
… ]
This is the end
-
Ladies and gentlemen, this is the final post I will be publishing at The
Reformed Broker....
The post This is the end appeared first on The Reformed Brok...
narratives everywhere
-
As investment professionals, we are faced with stories big and small. We
should spend more time evaluating how we analyze and react to them.
Porsche’s Next Flagship Will Be an EV Crossover
-
Despite hardcore motorsport enthusiasts collectively proclaiming the 911 as
Porsche’s greatest model of all time, it’s presently being outsold by the
all...
Save pdf smaller size mac online
-
High image quality, bring your ideas to life save pdf smaller size mac
online beautiful presentations. and instantly got the shrunken file!
Although the de...
The Senator Vs. the C.I.A.
-
Last week, Senator Dianne Feinstein, the chair of the Senate Select
Committee on Intelligence, announced “grave concerns” that C.I.A. officers
had …
New Book: ESCAPING PATERNALISM
-
by Mario J. Rizzo and Glen Whitman Book description The burgeoning field of
behavioral economics has produced a new set of justifications for
paternalism. ...
Thomas Struth: Striving for the big picture
-
Review by Tim Connor
As a photography student at Kunstakademie *Düsseldorf* in the 1970s, Thomas
Struth learned to create big, highly detailed pictures wi...
Assorted on India
-
India’s growth in the 2000s: Four facts
The rupee: Frequently asked questions
Talk is cheap
Conclusion: there is precious little fundamental reason for...
Trading the Odds on Monday – June 15, 2009
-
Friday’s session looked like a playbook example concerning -form a
historical and statictical perspective- the most probable outcome based on
those setups ...
Notes on Chinese inflation
-
http://noelmaurer.typepad.com/aab/2010/01/i-have-your-chinese-consumer-price-inflation-right-here.html
I don’t see that much of a mystery. The primary way i...
Go On Till You Come to the End; Then Stop
-
Go On Till You Come to the End; Then Stop
ScienceBlogs is coming to an end. I don't know that there was ever a really
official announcement of this, but t...
Ode to Canada
-
*Lake Ontario, 1688*
Even a short trip from Michigan to Canada refreshes the US visitor’s
confidence that an inclusive multicultural democracy is not o...
Pakistan Update
-
This morning in Islamabad, UNHCR and other UN staff held a special ceremony
to pay homage to colleagues killed in the bombing of the Pearl Continental
Hote...
To Russia With Love
-
Conspiracy theories are dangerous things and should generally not be
believed. OTOH, if the most benign among the plausible interpretations is
not all th...
Ten Years Since the Biggest VIX Spike Ever
-
Ten years ago today, we witnessed that largest one-day VIX spike in the
nearly three decade history of the VIX. On that day, the VIX rallied from
a prior...
The Final Addiction
-
< A few statements from evolutionary biologists: “Immunization is also
making once-rare or non-existent genetic variants of pathogens more
prevalent …....
The US Treasury’s missed opportunity
-
The US Treasury recently published the first in a series of reports
designed to implement the seven core principles for regulating the US
financial system ...
We've Moved!
-
If you're reading this, it means you've been following the
http://georgewashington2.blogspot.com address. We switched over to
WordPress, and from now on...
-
This site remains available as an archive of my informal writings between
2007-2013. For those interested in current commentary, I now post a regular
weekl...
Trump Indictment # 4 - Georgia-Part One
-
Fulton County Georgia District Attorney Fani Willis spoke about the Georgia
Grand Jury Indictment issued yesterday. A review of the Indictment and my
thoug...
Save pdf smaller size mac online
-
High image quality, bring your ideas to life save pdf smaller size mac
online beautiful presentations. and instantly got the shrunken file!
Although the de...
Should losers from free trade be compensated?
-
It's been a while... far too long. Suffice to say that my day job has been
keeping me very busy this year and has made blogging difficult. I want to
rect...
Aging Might Not Be Inevitable
-
There are biological underpinnings to aging—and so researchers are
investigating cell manipulations, transfusions of young blood, and chemical
compounds th...
Good Chart Checklist
-
Note: this was prepared for my ECON 3403 students, and is a list of all of
the mistakes I commonly see in student charts. Please add your suggestions
for t...
Donald Trump’s Brand Takes a Haircut
-
The Donald Trump brand has been bruised so badly by the presidential
candidate’s controversial remarks on Mexican immigration that some
marketing and licen...
Please Use Zerohedge.org
-
As zerohedge.com is currently experiencing technical issues, please use the
following website for all the latest updates: www.zerohedge.org while we
resolv...
Politics=The art of the possible Political Theory=Theory of the good, just,etc. society. Political Economy=The art of the possible Economics=Theory of economic behavior
Political Parties are comprised of: 1) Policies 2) Interest Groups 3) Ideologies 4) Cultural views
Don's Hermeneutics: Like Rabbi Yishmael's Rules, Only Not
"Searle's Sagacity":
"If a person can't explain something simply, then they don't know what they're talking about. The only exception being Kant."
"Corollary to Searle's Sagacity":
"questions should be simple and comprehensible, and meant to elicit a simple explanation."
"Samuel Johnson's Dictum":
One thing about passing fifty years of age is that I now feel old enough to invoke what I call Samuel Johnson's Dictum. It is thus: If I invoke a view based on an author that I read in the past, and that view is not actually held by that author, I'm more than willing to claim the view as originating with me. The beauty of this Dictum is that it is self-referential. It is based upon my reading of Johnson and on Boswell, but I can't remember the actual references that led me to believe that Johnson believed something like this. In any case, I do.
"Burke's Principle":
Another of my motley list of nostrums is what I call Burke's Principle. Burke's Principle holds that there is a distinction between: 1) Political Theory: A theory of the perfect society, the good life, etc. Your general political philosophy. 2) Politics: The rather messy art of governing which involves dealing with what is possible on earth and compromising as the need arises.
"Burke's Rule": "All government, indeed every human benefit and enjoyment, every virtue, and every prudent act, is founded on compromise and barter. "
"Burke's Paradox": "Mere parsimony is not economy. Expense, and great expense, may be an essential part in true economy."
"Burke's Prescience":
"You can never plan the future by the past.
Letter to a Member of the National Assembly (1791)"
"Burke's Wisdom":
"A very great part of the mischiefs that vex the world arises from words.
Letter to Richard Burke"
"Bagehot's Principles":
1) If the Fed exists, it will be the Lender Of Last resort, and that has to be taken in to account in real world Political Economy. It should lend freely in a crisis to solvent banks.
2) The rules for LOLR( from here on down this includes any government guarantee ) intervention should be clear, public, and followed, otherwise Moral Hazard is ineffective. All guarantees must be explicit.
3) The terms must be onerous.
4) The LOLR should get something valuable in return.
Here are a few others:
5) The taxpayer's interests should come first.
6) Moral Hazard needs to be constantly applied by quickly liquidating problem banks in normal times.
7) Any entity receiving a guarantee will have to be supervised or regulated effectively, and violations should be quickly and severely punished.
8) There is no doubt that any entity receiving a LOLR guarantee will need to be more conservative in its practices in order to limit the liability of the taxpayer.
9) There should be a class of financial concerns that can act more freely, but they should not receive LOLR guarantees. They will be strictly supervised or regulated though, and are subject to laws against fraud, etc."
"Who can forget the end of "Planet of the Apes" when Charlton Heston, kneeling before the half-buried remains of the Statue of Liberty, slams his fists into the sand and cries, "You maniacs! You blew it up! Ah, damn you ... damn you all to hell!"
Now imagine the same scene, but with a half-buried Morgan Stanley building standing in for Miss Liberty and a time-traveling Walter Bagehot playing the lead and you've got the perfect Hollywood dramatization of the real-life tragedy that, with luck, is having its denouement on Wall Street.
Bagehot? The great Victorian man of letters, best remembered today as the second and most celebrated editor of the British magazine The Economist, wasn't exactly a hunk. But he certainly could have delivered those futile last lines with real conviction, for he was among the first to recognize the vast destructive potential of that newfangled weapon of Victorian finance: the modern central bank.
Bagehot first alerted readers to this potential and offered his suggestions for containing it in an article that appeared in The Economist after the great panic and credit crisis of 1866. That panic witnessed the spectacular collapse of Overend, Gurney & Co., which had long been Great Britain's premier investment house.
Bagehot understood that, during such panics, the Bank of England alone commanded the confidence needed to serve other financial firms as a "lender of last resort." But as Bagehot put it later in his book "Lombard Street: A Description of the Money Market" (1873), the bank's "faltering way" -- its arbitrary and inconsistent use of its unique lending powers -- tended only to make things worse.
"The public," Bagehot wrote, "is never sure what policy will be adopted at the most important moment: it is not sure what amount of advance will be made. ... And until we have on this point a clear understanding with the Bank of England, both our ability to avoid crises and our terror at crises will always be greater than they would otherwise be."
The ultimate source of trouble, Bagehot believed, was the very existence of the Bank of England and the special privileges it enjoyed. But because nothing save a revolution seemed likely to do away with the "Old Lady of Threadneedle Street," as it was called, Bagehot's preferred, practical solution was for the bank expressly to commit itself to lending freely during crises, though on good collateral only, and at "penalty" rates.
The restrictive provisions were supposed to limit aid to otherwise solvent firms panic had rendered illiquid.
Bagehot's recommendation has since become a sort of master precept of central banking -- albeit one that's mainly honored in the breach by central bankers.
To be fair to today's central bankers, there's never been much agreement on how to apply Bagehot's rule in practice. Just what do "good collateral" and "penalty rates" mean in times like these?
While no one might precisely be able to define good collateral -- and one can debate whether the rate at which banks offer to lend unsecured funds to other banks, known as the London Interbank Offered Rate, or LIBOR rate, plus 8 percent constitutes a "penalty" rate -- who even pretends that recent central bank lending has been based on good collateral?
But rescuing insolvent firms is the least of it. The real damage comes from the Treasury's utter lack of any consistent last-resort lending rule. The recently enacted financial institutions bailout bill does little to clarify this.
That's just the sort of thing that troubled Bagehot almost a century and a half ago, when central banks were still in their swaddling clothes. Yet central bankers and governments still don't get it, despite the lip service they pay to this great thinker from our past."
"The Unwisdom of Crowds Financial panics still require what Walter Bagehot prescribed--that practical men violate their own principles. by Christopher Caldwell 12/22/2008, Volume 014, Issue 14
Neither Barack Obama nor John McCain had much of value to say about the financial crisis as it raged through the headlines this fall. Rather than shred their campaign strategies, they played it safe, as most politicians would have. But in the name of justice we ought to recall that there was one candidate who did foresee our predicament with considerable accuracy when it still lay far in the future. Ron Paul, in almost every speech he made during the Republican primaries, spoke of bubbles, reckless credit growth, and the "unsustainability" of present policy. So why isn't there more demand for the common-sense solutions he put forward? Because common sense is not much use in a financial panic.
This was the great discovery of Walter Bagehot, the prolific 19th-century essayist and journalist, who was editor of the Economist from 1860 to 1877. (His name rhymes with gadget.) Ninety-nine percent of the time, common sense is a synonym for practicality. But in a serious banking crisis, doing the commonsensical thing--hunkering down and counting your pennies--has proved to be not practical at all. Bagehot's Lombard Street is an insider's look at the Bank of England, and at the principles on which political and financial leaders act when advanced economies come under pressure. Those principles are depressing in the extreme for anyone with an uncomplicated idea of how a democracy works. But they are effective. That is why, in the so-called Anglo-Saxon world, Bagehot's book still provides the bedrock of policy thinking during financial emergencies, including our present one.
Lombard Street was published in 1873, seven years after the sudden collapse of Overend, Gurney & Co., a bank that lost £11 million, spread panic among investors, sparked a run, and became "the model instance of all evil in business." The crisis made such a deep impression on British finance and government that the country did not have another bank run for 141 years--not until Northern Rock collapsed in the summer of 2007. (English investors must have longer memories than American ones. Most of our own noxious subprime mortgages were contracted, and the securities built on them concocted, after Enron became our own model instance of evil in 2001.) It was the Bank of England that took charge of averting panic, during the Overend, Gurney crisis and thereafter. It did so by injecting credit into the economy, by bailing people out. Bagehot approved of this. Many ordinary retailers could not pay their suppliers until they got the money for the things they sold. Without credit, they would be ruined, and the ruin would spread to those to whom they owed money. This was not a question of moral failing, it was just the way a modern economy worked.
But the modern economic system interacts with the modern political system--democracy--in a rather uncomfortable way. Indeed, at more than one juncture in Lombard Street, Bagehot framed the problem of booms and busts as part of the "increasingly democratic structure of English commerce." People in a democracy are most comfortable when their institutions do the same things that they would do as individuals. In a crisis, banks--like everyone else--reflexively hoard their money. But a central bank must do the opposite. It must lend freely.
This was the most basic affront to common sense that the Bank of England presented, but it was not the worst. The worst was that the bank could carry out its necessary duties as a lender of last resort only by breaking the law. The basis of the bank's operating procedure--and of its soundness--was the Bank Act of 1844. We would call it a regime of sound money. It included stringent caps on the ratio of notes issued to reserves held. These caps were hewed to when the economy was running smoothly. Yet at the time Bagehot was writing, a quarter century later, the law had already been suspended three times. Not just that. "No similar occasion has ever yet occurred," Bagehot wrote, "in which it has not been suspended." So the law on which the solvency of the British nation rested was ironclad, except when someone felt a need to break it.
Stranger still, never did the Bank of England acknowledge its duty as the lender of last resort. Some of its governors even denied that any such duty existed. Bagehot thought the bank should come clean about what it really was:
There should be a clear understanding between the Bank and the public that, since the Bank hold our ultimate banking reserve, they will recognise and act on the obligations which this implies--that they will replenish [the reserve] in time of foreign demand as fully, and lend it in times of internal panic as freely and readily, as plain principles of banking require.
But there was a reason for the central bankers' dissembling. If the bank ever acknowledged a duty to rescue banks by generous extensions of credit, it would create a form of moral hazard. Thomson Hankey, a Bank of England director whom Bagehot much admired (and to whom the financial writer James Grant devotes an admiring essay in his new book Mr. Market Miscalculates), called Bagehot's lender-of-last-resort views "the most mischievous doctrine ever broached in the monetary or banking world in this country."
In practice, Bagehot was right and Hankey was wrong. The bank was beyond question the lender of last resort. In principle, Hankey was right and Bagehot was wrong. Unless there was a real, credible threat that a bank would be allowed to fail, the guarantee of rescue would simply get priced into any financial bubble that developed, making things worse when the bubble popped. The situation required what we would now call "strategic ambiguity"--both Hankey's doctrine and Bagehot's practice, which contradicts it.
The situation today requires the same mix. Central banking is thus often a high-stakes game of chicken. And sometimes, when banks enter the game insufficiently scared, it will be played out to the end. It certainly was in September when the U.S. Treasury terrified the financial world by not coming to the rescue of Lehman Brothers. This was a catastrophe in terms of Bagehot's practice, but it will produce benefits in terms of Hankey's principle. It will discourage people from paying more than is reasonable for assets on the belief that they come equipped with an insurance policy (the promise of a central bank rescue) that has been underwritten by taxpayers. The Republicans who nearly derailed the Treasury's Troubled Assets Relief Program in September played a similar role.
A final problem is that there are limits to how accountable a central bank can be. Everyone is always hollering for clear rules and transparency. But a dirty secret of regulation is that it frequently influences conduct most effectively when it is capricious and opaque. Any regulatory system will reveal its vulnerabilities over long use. If it addresses economic problems in a predictable way, savvy investors will find a way to "game" that predictability. You can draw an analogy with antidepressant drugs. There is no permanent right match of medication for a depressive. Antidepressants work only until the mind (or is it the brain?) finds a way around them, at which point a new, unfamiliar drug must be substituted. In the same way, no matter how good the content of a regulatory regime, it must change periodically if big market players are to be kept from profiting off it.
As Bagehot outlined his system, he was conscious that the practical realities of banking required him to heap paradox upon paradox. There is a hint of both Andrew Jackson and Thomas Aquinas in the way he referred to central banking as an "unnatural" thing in its very conception. "The business of banking ought to be simple," he wrote. "If it is hard it is wrong." If it is hard, the banker is either delegating poorly or has entangled his institution in complex transactions where it has no business. According to Bagehot, "Adventure is the life of commerce, but caution, I had almost said timidity, is the life of banking."
Centralizing a society's cash reserves is complicated, reckless, and artificial:
A republic with many competitors of a size or sizes suitable to the business, is the constitution of every trade if left to itself, and of banking as much as any other. A monarchy in any trade is a sign of some anomalous advantage, and of some intervention from without. . . . The natural system of banking is that of many banks keeping their own cash reserve, with the penalty of failure before them if they neglect it.
In his ideas of company size, Bagehot harkened back to the 18th century rather than ahead to our own. To modern eyes, Bagehot is, as a factual matter, simply wrong. The natural tendency under free-market conditions is towards consolidation, and even monopoly. If you want small firms, you must protect them through government--whether this means Teddy Roosevelt-ian trust-busting, French-style subsidies to tobacconists, the EU's hounding of Microsoft, or the NIMBY anti-Wal-Mart campaigns aimed at preserving Mom-and-Pop stores. Bagehot sometimes contradicted himself on this point, noting also that "a large bank always tends to become larger, and a small one tends to become smaller," but his application of the word unnatural to a large central bank was frequent and must be taken as his settled view. It is curious that Bagehot, a contemporary of Marx, came to the opposite (and false) conclusion about how firms evolve.
Where Bagehot would agree with Marx is in his belief that there is something predictably destabilizing about modern economies. You don't need banks to have a precarious economy, or one liable to speculation--Bagehot noted that there were no banks, as we would understand them, in 1720, at the time of the South Sea Bubble and the Mississippi Scheme. But modern banking is precarious by design. "In exact proportion to the power of this system is its delicacy," he wrote. "I should hardly say too much if I said its danger." The power, delicacy, and danger all have the same source. In fact they are just different names for the same thing: leverage.
At the very opening of the book, Bagehot illustrates with exquisite simplicity how, at least in a boom economy, traders on margin can "harass and press upon, if they do not eradicate, the old capitalist." The old capitalist in question is the poor sap who believes all this stuff about neither-a-borrower-nor-a-lender-be and is foolish enough to be using his own cash:
If a merchant have £50,000 all his own, to gain 10 per cent on it he must make £5,000 a year, and must charge for his goods accordingly; but if another has only £10,000, and borrows £40,000 by discounts (no extreme instance in our modern trade), he has the same capital of £50,000 to use, and can sell much cheaper. If the rate at which he borrows be 5 per cent, he will have to pay £2,000 a year; and if, like the old trader, he make £5,000 a year, he will still, after paying his interest, obtain £3,000 a year, or 30 per cent, on his own £10,000. As most merchants are content with much less than 30 per cent, he will be able, if he wishes, to forego some of that profit, lower the price of the commodity, and drive the old-fashioned trader--the man who trades on his own capital--out of the market.
Later, Bagehot showed that this need for leverage is no different for those selling money than it is for those selling dry goods. The banker can no more choose not to lend than the merchant can choose not to borrow:
The bill-broker has, in one shape or other, to pay interest on every sixpence left with him, and that constant habit of giving interest has this grave consequence: the bill-broker cannot afford to keep much money unemployed. He has become a banker owing large sums which he may be called on to repay, but he cannot hold as much as an ordinary banker, or nearly as much, of such sums in cash, because the loss of interest would ruin him.
In finance, once you can have leverage, you must have leverage. Once you have some leverage, getting more of it than your competitors is a matter of survival. And when governments and central banks debate whether to loosen or tighten up money, they face a constant clamor from the financial world to permit more leverage still. That is why, even in democracies, the instruments of monetary policy tend to be kept far from the influence of voters, and even hidden from view. Otherwise, credit tends to spiral. Bubbles result.
Nothing could be more foolish than to assume that this process of spiraling speculation is unleashed by "greed," unless by greed you mean human nature. Credit spirals are a darker aspect of the world Adam Smith described in The Wealth of Nations and Bernard de Mandeville did in the Fable of the Bees. Just as society can be improved by the uncoordinated action of the selfishly motivated, an economy can collapse for reasons having nothing to do with anybody's cupidity.
We should be moral in the way we think about money, but a credit system tends to make a mess of moral accounting. Bagehot described London's financial district as "a sort of standing broker between quiet saving districts of the country and the active employing districts." Decent, puritanical Suffolk farmers want to put their money in a safe place; Lancashire entrepreneurs want money to put to work. Thanks to London bankers, both can follow their wishes and make a profit in the process. We have an idea that the Suffolk dairyman is the "moral" party here (he's saving) and the Lancashire speculator the "immoral" one (he's gambling). But, once a banking system intervenes, they are both gambling and they are both saving. In good times you are welcome to mouth the folkloric cliché that holds farmers to be better people than financiers. When depression looms, you had better realize that the rain falls on the just and the unjust.
Many Americans who have wound up underwater on their houses and maxed out on their credit cards are greedy, climbing, brand-intoxicated, materialistic shopaholics who thought the world owed them a living. But just as many of them are not. They are trapped, as surely as financial institutions are, in a system based on wild borrowing. Participation in this system is not exactly required, but it is not exactly optional, either. One's quality of life is determined not just by one's purchasing power but also by one's relative economicstanding. Chagrin at seeing one's neighbors get richer faster may be a sign of bad character, but do not for a minute assume there is nothing to feel chagrin about! When it comes to the very goods people deem most essential--the proper mate; the schooling of one's children; the size, location, elegance, and comfort of one's house--relative standing is more important than absolute wealth.
Those who kept their money in savings banks in the 1990s lost out to those who did things we are supposed to disapprove of, like "spending money they didn't have," borrowing profligately to invest in stocks and even bonds, which appreciated at an average of 15 percent a year over the decade. Among rich people, how one entered the present decade had more to do with how one had done in the stock market than with how one had done in the labor market. Is that just? Of course it's not! It's easy to see now. But while the boom was going on there was all sorts of rationalizing about why it was okay that the social hierarchy should be reordered through stock and housing speculation. One line of argument was that people who did not have a ton of money in stocks, as well as those who rented rather than bought the houses they lived in, were foolish. This line of argument peaked at the turn of the decade, when Americans elected a president who had argued that the public was foolish for not launching its retirement savings onto the open seas of the stock market.
Bagehot saw that a speculative mania eventually sweeps up everyone in its path. "Every great crisis reveals the excessive speculations of many houses which no one before suspected," he wrote, "and which commonly indeed had not begun or had not carried very far those speculations, till they were tempted by the daily rise of price and the surrounding fever." Avaricious people get hurt, but it is in the nature of crashes that they are not the ones who get hurt most. A tragic figure present in almost every historic account of speculation and collapse in history is the person who believed, year after year, that the boom was an illusion, and held himself aloof until, at the very last minute, whether out of self-doubt or deference to the opinions of his fellow man, he entered the fray and was (having bought at the top, rather than the bottom, of the market) wiped out. What a wicked irony! His punishment is as much for his long and wise forbearance as for his momentary weakness.
So the "cultural contradictions of capitalism" run deeper than we thought. The classic idea, as laid out in their different ways by the economist Joseph Schumpeter and the sociologist Daniel Bell, is that capitalism rewards diligence; diligence produces wealth; wealth begets idleness; and idleness undermines capitalism. But when, as now, push comes to shove, we can ask whether there is really anything particularly capitalist about the virtues of diligence and self-restraint. The real capitalist virtues appear to be optimism and luck. From a central-banking perspective, the cultural contradictions are not results of capitalism but elements of it.
The problem with central banking is that it reacts to a system that has been mismanaged by rewarding the managers. That is why objections to central banking, although they can come from the right (Ron Paul, Jim Bunning) or the left (Barney Frank, William Greider), tend to be populist. Bagehot was no populist. He was comfortable with the idea that what some people think should be more important than what other people think:
Almost all directors who bring special information labor under a suspicion of interest; they can only have acquired that information in present business, and such business may very possibly be affected for good or evil by the policy of the Bank. But you must not on this account seal up the Bank hermetically against living information.
Although he would surely fault Treasury Secretary Hank Paulson for many things, the criticism most often heard at present--that Paulson is too close to former colleagues on Wall Street, where he worked for years as CEO of Goldman Sachs--would strike Bagehot as misplaced.
Because it is on Wall Street, alas, that "the state of credit" is to be determined:
The state of credit at any particular time is a matter of fact only to be ascertained like other matters of fact; it can only be known by trial and inquiry. And in the same way, nothing but experience can tell us what amount of "reserve" will create a diffused confidence.
To be blunt, credit is successfully reestablished when financial elites say, "When." Credit is close to a synonym for the mood of the ruling class. To say an economy is based on credit is to say it is based on animal mysteries. Glamour, prestige, élan, sprezzatura, cutting a figure . . . that is what the economy is made of. It is a rather terrifying thought. Viewed as Bagehot viewed it, from the perspective of a central bank in a crisis, an advanced economy looks an awful lot like a primitive economy."
"Loyal readers, please take a moment to check out Gretchen Morgenson’s column this week. She’s taken a close look at the buyout of Bear Stearns organized by the Federal Reserve, and she has come to an intriguing conclusion: that the Fed not only wanted to prevent financial havoc - it also wanted to deter speculators who were betting on big banks to fail.
Adherents of the Walter Bagehot school of central banking - and I have been among them at times - have cried foul at the sight of big bailouts and the granting of emergency credit at low interest rates. The Bagehot argument is that emergencies that arise from the risks that banks have chosen to take should not be treated with overwhelming sympathy. Emergency credit should be offered, yes, but at rates that will make banks think twice about using the safety net again. That’s not the case this time around (neither in the United States nor in Britain, and probably not in Europe either by the time the folks in Brussels are finished), so the central banks may be telling financial institutions that they can take silly risks without fear of disaster.
But if Morgenson is right, there is a long-term purpose here, too: to reduce the winnings of those who bet on failure, and thus to reduce the incentives to bring that failure to pass. And let’s face it, the speculators aren’t operating in a vacuum; their bets can start to snowball with market sentiment, as they did against Lehman Brothers last week. Still, the Bagehot argument (often called moral hazard) is also a powerful one - which one do you agree with?"
"In his 1873 book “Lombard Street,” the closest thing to a user’s guide to central banking, Walter Bagehot criticized the Bank of England’s handling of earlier panics by responding “hesitatingly, reluctantly, and with misgiving.”
Federal Reserve Chairman Ben Bernanke, who has read his Bagehot and kept a copy in his Princeton office when he was a professor, responded to recent developments first by pumping money into the markets through the New York Fed’s open-market operations and then last week by easing the terms on loans to banks from the Fed’s discount window.
Bagehot (pictured at right) still makes for good reading at times like this.
“What is wanted and what is necessary to stop a panic is to diffuse the impression, that though money may be dear, still money is to be had. If people could be really convinced that they could have money if they wait a day or two, and that utter ruin is not coming, most likely they would cease to run in such a mad way for money. Either shut the Bank at once, and say it will not lend more than it commonly lends, or lend freely, boldly, and so that the public may feel you mean to go on lending. To lend a great deal, and yet not give the public confidence that you will lend sufficiently and effectually, is the worst of all policies; but it is the policy now pursued.”
Robert Feldman, Morgan Stanley’s chief economist for Japan, writes in a note today that it’s key to distinguish between internal discredit — private domestic lenders retreating — and external discredit, which Bagehot defined as a foreign drain on a bank’s money. (Bagehot’s solution to the problem of external discredit is to still lend freely but “at very high rates.”) That doesn’t apply in today’s floating rate system, Feldman says, and exchange rates don’t provide a good substitute, with the dollar’s drop against the yen suggesting we have external discredit while the strengthening against the euro saying we don’t.
Feldman writes: “My view is that the modern counterpart of ‘external discredit’ is moral hazard. The credit of the U.S. IS a problem, since no one knows how big the subprime and related housing market problems really are. Given how poorly banks know their clients, the ‘high rates’ part should come into play. There is no way to re-establish confidence unless those who have made loans to questionable borrowers pay a price for rash lending. Only then will markets regain confidence that risk is under control.
“The next stage of the credit problem — and whether it affects the real economy seriously — depend on eliminating the moral hazard,” Feldman says. “The faster the moral hazard in eliminated, the less impact on the real economy.”
Fed officials are acutely aware of the moral hazard, having resisted action for weeks to not be seen as bailing out risky investments. But they also don’t want a crisis to feed on itself. The Fed stressed its statement, in lowering the discount rate for banks, that it would accept “a broad range of collateral…including home mortgages and related assets.” The central bank sought to reassure a market that had been roiled by risky investments in subprime mortgages.
That’s how the Bank of England halted a panic in 1825, as Bagehot recounts: “A panic, in a word, is a species of neuralgia, and according to the rules of science you must not starve it. The holders of the cash reserve must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others. They must lend to merchants, to minor bankers, to ‘this man and that man,’ whenever the security is good. In wild periods of alarm, one failure makes many, and the best way to prevent the derivative failures is to arrest the primary failure which causes them. The way in which the panic of 1825 was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. ‘We lent it,’ said Mr. Harman, on behalf of the Bank of England, ‘by every possible means and in modes we had never adopted before; we took in stock on security, we purchased Exchequer bills, we made advances on Exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the Bank, and we were not on some occasions over-nice. Seeing the dreadful state in which the public were, we rendered every assistance in our power.’ After a day or two of this treatment, the entire panic subsided, and the ‘City’ was quite calm.”
"Bagehot advocated in 1873 that a Lender of Last Resort in a crisis should lend at a penalty rate to solvent but illiquid banks that have adequate collateral. The doctrine has been criticised as having no place in our modern interbank market, but this is wrong. Bagehot’s prescription aims to eliminate the coordination problem of investors at the base of the crisis. It is still a useful guide for action when the interbank market stalls.1 It makes clear that discount-window lending to entities in need may be necessary in a crisis.
Bagehot's doctrine, however, is easy to state and hard to apply. It requires the central bank to distinguish between institutions that are insolvent and those that are merely illiquid. It also requires them to assess the collateral offered. Central banks, because of information limitations, are bound to make mistakes, losing face and money in the process. This doesn’t mean they should not try. Poor collateral versus massive liquidity
The collateral should be valued under “normal circumstances”, that is, in a situation where the coordination failure of investors does not occur. This involves a judgment call in which the central bank values the illiquid assets. A central bank that only takes high quality collateral will be safe, but will have to inject much more liquidity and/or set lower interest rates to stabilise the market. This may fuel future speculative behavior. Some of this may have happened in the Greenspan era, in the aftermath of the crisis in Russia and LTCM, and after the crash of the technological bubble. The ECB and the Federal Reserve have accepted now partially illiquid collateral that the market would not. This seems appropriate and releases pressure to lower interest rates to solve the problem, something that should be done only if there are signs of deterioration in the real economy. The problem is that central banks are extending the lender of last resort facility outside the realm of traditional banks to entities, like Bear Stearns, that they do not supervise and, therefore, over which they do not have first hand information. How does the Fed know whether Bear Stearns or other similar institutions are solvent? It seems that the Fed is not following Bagehot’s doctrine here.
Finally, if banks and investors are bailed out now, why should they be careful next time? This is the moral hazard problem: help to the market that is optimal once the crisis starts has perverse effects in the incentives of market players at the investment stage. The issue is that only when the moral hazard problem is moderate does it pay to eliminate completely the coordination failure of investors with central bank help. When the moral hazard problem is severe, a certain degree of coordination failure of investors - that is, allowing some crises - is optimal to maintain discipline when investing and, amending Bagehot, some barely solvent institutions should not be helped."
http://www.house.gov/jec/imf/blueprnt.htm
"This goal is not new. In fact, it underlay Walter Bagehot's (1873) classic policy prescriptions for domestic central banking: to lend freely at a penalty rate on good collateral. Bagehot argued an elastic and immediate supply of liquidity was essential to an effectively structured lender of last resort, and that appropriate loss sharing rules in the form of collateral requirements and penalty interest rates would discourage abuse of the safety net."
"By slashing interest rates too much in 2007-2008, the Fed has accentuated the foreign drain and thus made the alleviation of the domestic drain more difficult. Yet, despite this mistake, Bagehot would approve of other actions the Fed has taken to deal with the domestic drain by unblocking specific impacted domestic markets. These include (1) swapping Treasury bonds for less safe private bonds, (2) opening its discount window to shaky borrowers, and (3) maybe even rescuing Bear Sterns. He would also approve of the relaxation of capital constraints on Fannie Mae, Freddy Mac and so on, for mortgage lending. Yet these measures will be insufficient if the foreign drain continues.
To repeat Bagehot's Rule: "very large (domestic) loans at very high rates are the best remedy for the worst malady of the money market when a foreign drain is added to a domestic drain." The Fed, and the U.S. government more generally, have so far got it only half right."
"More than a century ago, a British economic journalist, Walter Bagehot, set out the classical principles for a central bank acting as lender of last resort: lend freely in a crisis at a penalty rate against collateral. Adapted to international lending, Bagehot's rule is the proper rule for a restructured, more effective IMF."
The market maker of last resort function can be fulfilled in two ways. First, the central bank can make outright purchases and sales of a wider range of securities than they currently do. Second, central banks can accept a wider range of securities as collateral in repos, and in collateralised loans and advances at the discount window than they currently do. Following Bagehot’s rule, the MMLR should buy these securities outright or accept them as collateral only on terms that would imply a stiff financial penalty to the owner.The central bank of course already applies a liquidity ‘haircut’ even to liquid instruments offered as collateral in repos or at the discount window.Because the MMLR would have to establish a buying price ‘in the dark’, that is, unaided by recent relevant market prices, and would inevitably take on much more credit risk than central banks have become accustomed to, the ‘haircuts’ should be severe – a financial version of ‘short back and sides’.
"Further crises in 1857 and 1866 prompted the debate between Bagehot and Thomson Hankey, a director and former governor of the Bank of England. Notwithstanding the Bank’s undoubted responsibility, as trustee of the nation’s reserve, to support the financial markets, Bagehot wrote: If we ask how the Bank of England has discharged this great responsibility, we shall be struck by three things: first, . . . the Bank has never by any corporate act or authorised utterance acknowledged the duty, and some of its directors deny it; second, (what is even more remarkable), no resolution of Parliament, no report of any Committee of Parliament (as far as I know), no remembered speech of a responsible statesman, has assigned or enforced that duty on the Bank; third (what is more remarkable still), the distinct teaching of our highest authorities has often been that no public duty of any kind is imposed on the Banking Department of the Bank; that, for banking purposes, it is only a joint stock bank like any other bank; that its managers should look only to the interest of the proprietors and their dividend; that they are to manage as the London and Westminster Bank or the Union Bank manages. (1873, 153–54) Although the Bank usually in the end supplied the market, its “faltering way” caused needless uncertainty and more severe panics than if it communicated clearly that it could be counted on (Bagehot 1873, 64). According to Bagehot, the rules— to lend freely at penalty rates on sound collateral—under which assistance would be provided should be stated also. The public is never sure what policy will be adopted at the most important moment: it is not sure what amount of advance will be made. The best palliative to a panic is a confidence in the adequate amount of the Bank reserve, and in the efficient use of that reserve. And until we have on this point a clear understanding with the Bank of England, both our liability to crises and our terror at crises will always be greater than they would otherwise be. (1873, 196–97)"
One which doesn't quite:
http://www.portfolio.com/views/blogs/market-movers/2008/05/13/bernanke-on-bagehot?rss=true "Bernanke on Bagehot
I doubt a week has gone by since last summer during which I haven't seen some pundit or other trot out Walter Bagehot's dictum that in the event of a credit crunch, the central bank should lend freely at a penalty rate. More often than not, this is contrasted with the actions of the Federal Reserve, which seems to be lending freely at very low interest rates.
Ben Bernanke, in a speech today, addressed this criticism directly:
What are the terms at which the central bank should lend freely? Bagehot argues that "these loans should only be made at a very high rate of interest". Some modern commentators have rationalized Bagehot's dictum to lend at a high or "penalty" rate as a way to mitigate moral hazard--that is, to help maintain incentives for private-sector banks to provide for adequate liquidity in advance of any crisis. I will return to the issue of moral hazard later. But it is worth pointing out briefly that, in fact, the risk of moral hazard did not appear to be Bagehot's principal motivation for recommending a high rate; rather, he saw it as a tool to dissuade unnecessary borrowing and thus to help protect the Bank of England's own finite store of liquid assets. Today, potential limitations on the central bank's lending capacity are not nearly so pressing an issue as in Bagehot's time, when the central bank's ability to provide liquidity was far more tenuous.
I'm no expert on Walter Bagehot, and in fact I admit I've never read Lombard Street. But I'll trust in Bernanke as an economic historian on this one, unless and until someone else makes a persuasive case that Bagehot's penalty rate really was designed to punish the feckless rather than just to preserve the Bank of England's limited liquidity."
"So, we have, what I will call "Grant's Graham For Investing":
1) Decent Size
2) Current Assets Exceed Liabilities By Two Times
3) 10 Continuous Years Of Profit
4) 20 Continuous Years Of Dividends
5) 10 Years Of Earnings Growth Exceeding 33%
6) Price To Earnings Ratio Less Than 15
7 ) Price To Book Ratio Less Than 1.5"
"Cake As Gift Theory":
Now, I feel similarly about government incentives. When Fannie and Freddie tempted investors, this led to the housing bubble. I think that I'm going to call this the Cake As Gift Theory. I hand you a cake assuming that you have the good sense to eat it over time, and you gorge yourself and eat it at one sitting and get sick. Clearly I'm responsible for this by handing you the cake. Give you a gift or incentive, clearly I must assume that it will cause you to be irrational.
"Spigot Theory":
One other pet theory I have about finance, besides Bagehot's Principle, is the Spigot Theory. I might rename it. It applies to the low rate of interest or the sloshing pool of money explanations for the current crisis. Turn the tap too far, then you can't stop the tub from overflowing, even if you're a human agent standing right next to the tub. I call this a mechanistic explanation as opposed to an explanation based on human agency.
"The Pragmatic Milton Friedman Principle":
The Pragmatic Milton Friedman Principle. Friedman introduced a concept called the Negative Income Tax. He proposed it saying that it was a pragmatic compromise between the Welfare State and a basic libertarian position.
"Hardy's Harangue": To Me:
"There is no scorn more profound, or on the whole more justifiable, than that of the men who make for the men who explain. Exposition, criticism, appreciation, is work for second-rate minds. "
"Titchmarsh's Two Truths":
1)"Perhaps we could regard numbers as a sort of medium of exchange, like money. Most people are really interested in the goods and services which the world offers, and to them money is only a symbol for these. But it is not a meaningless symbol. A system of barter, in which we do without money and merely exchange goods, would be very inconvenient, and practically impossible in a complicated society. So a system in which we reduce all mathematics to statements such as "I have more fingers than you have noses" would be too cumbrous to contemplate seriously. Numbers are symbols, and very useful and interesting ones. To mathematicians who work with them every day they acquire a reality at least equal to that of anything else. "
2) "The question what numbers are has been much debated by philosophers, and they do not seem to have reached any agreement about it. There is nothing particularly surprising or distressing about this. It has been said that mathematicians are happy only when they agree, and philosophers only when they disagree. Philosophic doubts about the nature of number have never prevented mathematicians from getting on with their calculations, or from agreeing when they have got the right answer. So perhaps the situation is satisfactory to all parties. "
"Thoreau's Truth":About Government: "I heartily accept the motto, "That government is best which governs least"; and I should like to see it acted up to more rapidly and systematically. Carried out, it finally amounts to this, which also I believe--"That government is best which governs not at all"; and when men are prepared for it, that will be the kind of government which they will have. Government is at best but an expedient; but most governments are usually, and all governments are sometimes, inexpedient."
"Will's Warning": Concerning The Use Of "Socialism": Hyperbole is not harmless; careless language bewitches the speaker's intelligence. And falsely shouting "socialism!" in a crowded theater such as Washington causes an epidemic of yawning.
"Kling's Principle":About Regulated Banks And Unregulated Financial Entities "The banks seem to find a way to take risks, and the unregulated folks seem to find a way to get guarantees."
"Janeway's Dictum": On Political Economy "Political economy is not a science, it's a clinical art, like medicine."
"Cowen's Creed": On Policies
"YOU CAN’T TURN BAD TO GOOD The good New Deal policies, like constructing a basic social safety net, made sense on their own terms and would have been desirable in the boom years of the 1920s as well. The bad policies made things worse. Today, that means we should restrict extraordinary measures to the financial sector as much as possible and resist the temptation to “do something” for its own sake."
"Hendry's Heartfelt":
"I antagonise people,' says Hugh Hendry. 'It's part of my skill set."
"Diebel's Dare:
"You can’t be forced out further on the yield curve than a perpetual.”
"Peston's Promise": Good Until ...
"And, as I've been pointing out for some time, we are being asked to provide life support to a swathe of the real economy, from steel makers to car manufacturers.
The Government will succumb and will lend taxpayers' money to non-financial companies.
In a way, there's no choice, because we'll be hobbled for years as an economy if our few remaining manufacturers and exporters are wiped out."
"Trader's Narrative's Due Diligence":
"The process of investigation undertaken by an party to gather material information on actual or potential risks involved in a financial transaction or relationship."
My Favorite Dish: A Ritz Salad Apples, grapefruit and potatoes in a mayonnaise sauce. Delicious!
Favorite Writer: Claud Langham
Best Philosophical Analysis Ever: "You would not enjoy Nietzsche, sir. He is fundamentally unsound."
The Quotes Above
W. Bagehot, R.W. Emerson, M. Proust, W.H. Auden, W. Bagehot, P.Levine
Read J.L. Austin "A Plea For Excuses" here:
http://www.ditext.com/austin/plea.html
Read " Reflections on the Revolution in France by Edmund Burke 1790" here:
Read Remarks by Governor Ben S. Bernanke Before the National Economists Club, Washington, D.C. November 21, 2002Deflation: Making Sure "It" Doesn't Happen Here"
You who live secure In your warm houses Who return at evening to find Hot food and friendly faces:
Consider whether this is a man, Who labours in the mud Who knows no peace Who fights for a crust of bread Who dies at a yes or a no. Consider whether this is a woman, Without hair or name With no more strength to remember Eyes empty and womb cold As a frog in winter.
Consider that this has been: I commend these words to you. Engrave them on your hearts When you are in your house, when you walk on your way, When you go to bed, when you rise. Repeat them to your children. Or may your house crumble, Disease render you powerless, Your offspring avert their faces from you.
Translated by Ruth Feldman And Brian Swann
For me, being a Jew means feeling the tragedy of yesterday as an inner oppression. On my left forearm I bear the Auschwitz number; it reads more briefly than the Pentateuch or the Talmud and yet provides more thorough information. It is also more binding than basic formulas of Jewish existence. If to myself and the world, including the religious and nationally minded Jews, who do not regard me as one of their own, I say: I am a Jew, then I mean by that those realities and possibilities that are summed up in the Auschwitz number.
– Jean Améry, At the Mind's Limits, p. 94
Style is not something applied. It is something that permeates. It is of the nature of that in which it is found, whether the poem, the manner of a god, the bearing of a man. It is not a dress. W. Stevens
Man can embody truth but he cannot know it. W.B. Yeats
Do you approve of violence, Miss Boon? Nor do I. It reeks of spontaneity C. Langham
J.L. Austin
'there is no simple and handy appendage of a word called "the meaning of the word (x)"'
...our common stock of words embodies all the distinctions men have found worth drawing, and the connections they have found worth marking, in the lifetime of many generations: these surely are likely to be more numerous, more sound, since they have stood up to the long test of survival of the fittest, and more subtle, at least in all ordinary and reasonable practical matters, than any that you or I are likely to think up in our armchair of an afternoon – the most favorite alternative method
L. Wittgenstein
94. But I did not get my picture of the world by satisfying myself of its correctness; nor do I have it because I am satisfied of its correctness. No: it is the inherited background against which I distinguish between true and false.
95. The propositions describing this world-picture might be part of a kind of mythology. And their role is like that of rules of a game; and the game can be learned purely practically, without learning any explicit rules.
96. It might be imagined that some propositions, of the form of empirical propositions, were hardened and functioned as channels for such empirical propositions as were not hardened but fluid; and that this relation altered with time, in that fluid propositions hardened, and hard ones became fluid.
97. The mythology may change back into a state of flux, the river-bed of thoughts may shift. But I distinguish between the movement of the waters on the river-bed and the shift of the bed itself; though there is not a sharp division of the one from the other.
98. But if someone were to say "So logic too is an empirical science" he would be wrong. Yet this is right: the same proposition may get treated at one time as something to test by experience, at another as a rule of testing.
99. And the bank of that river consists partly of hard rock, subject to no alteration or only to an imperceptible one, partly of sand, which now in one place now in another gets washed away, or deposited.
100. The truths which Moore says he knows, are such as, roughly speaking, all of us know, if he knows them.
L. Wittgenstein On Certainty Go here To Read http://budni.by.ru/oncertainty.html
From "The Snowfall" by D. Justice
The landmarks are gone. Nevertheless
There is something familiar about
this country.
Slowly now we begin to recall
The terrible whispers of our elders
Falling softly about our ears
In childhood, never believed till now.
Jackson's Rules Of The Road
I'm going to be a happy idiot And struggle for the legal tender Where the ads take aim and lay their claim To the heart and the soul of the spender And believe in whatever may lie In those things that money can buy Thought true love could have been a contender Are you there? Say a prayer for the pretender Who started out so young and strong Only to surrender
Gotta do what you can just to keep your love alive Trying not to confuse it with what you do to survive
And in the end they traded their tired wings For the resignation that living brings And exchanged loves bright and fragile glow For the glitter and the rouge And in the moment they were swept before the deluge
Don't confront me with my failures I had not forgotten them
But its a long way that I have come Across the sand to find you here among these people in the sun Where your children will be born You'll watch them as they run Oh its so far the other way my life has gone
I caught a ride into the city every chance I got I wasn't sure there was a name for the life I sought Now I'm a long way gone down the life I got I don't know how I believed some of the things I thought
Rock me on the water Sister will you soothe my fevered brow Rock me on the water, maybe Ill remember Maybe Ill remember how Rock me on the water The wind is with me now So rock me on the water Ill get down to the sea somehow
But you said "morocco" and you made me smile And it hasn't been that easy for a long, long while And looking back into your eyes I saw them really shine Giving me a taste of something fine Something fine
"In camp too, a man might draw the attention of a comrade working next to him to a nice view of the setting sun shining through the tall trees of the Bavarian woods (as in the famous water color by Dürer), the same woods in which we had built an enormous, hidden munitions plant.One evening, when we were already resting on the floor of our hut, dead tired, soup bowls in hand, a fellow prisoner rushed in and asked us to run out to the assembly grounds and see the wonderful sunset.Standing outside we saw sinister clouds glowing in the west and the whole sky alive with clouds of ever-changing shapes and colors, from steel blue to blood red.The desolate grey mud huts provided a sharp contrast, while the puddles on the muddy ground reflected the glowing sky.Then, after minutes of moving silence, one prisoner said to another, 'How beautiful the world could be!'
Groucho Marx to S J Perelman: “From the moment I picked up your book until I put it down, I was convulsed with laughter. Some day I intend reading it.”
Brookings Papers on Economic Activity, vol. 2, pp. 277-326. 
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