Money, Credit & Financial Systems

Category: Regulatory

Why Didn’t Eric Holder Go After the Bankers? | The New Yorker

In the years following the financial crisis many have wondered (with varying degrees of incredulity) why no senior banking executives were criminally prosecuted.

Instead, as John Cassidy writes in the New Yorker, there’s been a succession of monster settlements between financial institutions and the US Justice Dept.

“We seem to have stumbled into a new form of corporate regulation,” I noted at the time of the JPMorgan settlement [November 2013], “in which nobody in the executive suite is held personally accountable for wrongdoing lower down the ranks, but the corporation and its stockholders are periodically socked with huge fines for past abuses.”

To the extent explanations for the failure to prosecute have been offered, they usually come down to two things.

First, although foolishness and cupidity were ubiquitous in the years leading up to the crisis, proving intent to defraud can be a tricky business as the Justice Dept discovered in its attempt to prosecute two Bear Stearns bankers in 2009.

Second, there’s the “we might end up destroying a systemically important bank” excuse. In other words, the Justice Dept version of “too big to fail”. Read the rest of this entry »

Reintroducing big banks to the market

Two senior fellows at the Bank for International Settlements (BIS) recently proposed a scheme for recapitalising too big to fail banks.

It’s quick and simple, respects the existing credit hierarchy, lets the market determine the ultimate allocation of losses and spares long-suffering taxpayers any further pain.

As well as tidying up a hitherto insoluble problem, their plan would reintroduce a far broader range of market disciplines into the future determination of financial system risks. Hallelujah.

If they really have nailed it (and I think they probably have), this is a big deal.

Still, even the best horse can’t run when hobbled and politics, private interests and the perverse power of sunk costs may do just that:

And even though not much progress has been made by big jurisdictions such as the EU and US, what has been achieved has cost so much time and labor that the authorities may not want to unravel it and start afresh. That would be a shame. TBTF hasn’t gone away, and the next banks to need resolving may not be as small as Cyprus’s. (WSJ)

“Control Rights (and wrongs)”

In the wake of the crisis, the question of whether financial markets are capable of effective self-regulation took centre stage. The near unanimous verdict was that they are not. The crisis itself, following on as it did from a period of extended deregulation, seemed to provide a definitive QED. So much so that surprisingly little attention has been devoted to working out why this might be so.

It has, in short, become an article of received wisdom, rarely questioned other than at sites like The Cobden Centre.

Andrew Haldane[1] of the Bank of England did so in a recent speech. Although I’m not convinced he always followed the logic of his analysis to its natural conclusion, he clearly outlined the structural developments that led to the current debacle and offered several sensible policy suggestions.

It was a long speech: the transcript runs to eighteen closely typed pages with a further eleven of references, charts and tables. It would make no sense for me to try to cover the whole thing in any detail: for those sufficiently interested in the topic, do read the original.

What I want to do is bring forward enough of the material to enable a closer focus on some of the more critical issues, and to highlight a few areas where I think Mr. Haldane may be in error.

Read the rest of this entry »

Some further thoughts on financial reform

We’re fooling ourselves if we blame the recent crisis on character defects unique to our time, be it unusually lax regulators, particularly shortsighted politicians, or financial market participants avaricious beyond the norm.

Truth is, each of these qualities fluctuates with the prevailing social mood: they’re inherently pro-cyclical. When it would be ideal from society’s point of view for them to zig, they tend to zag. Nor is there much reason to think this is going to change anytime soon. We’re human, all too human, and so would be well advised to insulate critical social systems from our long-term shifts in sentiment.

Easier said than done, though. Not only because designing foolproof (or, more accurately, resilient) systems isn’t easy, but also because even assuming we do there’s every chance our progeny will find a way to undo them during the next great wave of optimism.

Still, we can but try.

Adair Turner (chairman of the UK Financial Services Authority) and Mervyn King (Governor of the Bank of England) are both acutely aware of this dilemma. Far more than any other senior financial markets officials, they try to get at the deeper underlying causes.

On Monday, October 25th, King gave a talk in New York entitled “Banking: From Bagehot to Basel, and Back Again”. Read the rest of this entry »

Macroeconomic Resilience

Markets, indeed economies as a whole, are complex adaptive systems. Like biological ecosystems, they continuously and spontaneously order themselves in response to unfolding influences, large and small, internal and external.

When it comes to nature, we’re both part of it and a profound external influence. We shape the world around us for ill and sometimes for good, not only through deliberate actions but also, of course, merely by being here. Some of our activities and their consequences in the natural world, were we only willing to listen, could teach us much about how to better manage man-made systems such as the markets and the economy.

Forestry management provides a striking example. Our natural inclination is to put fires out wherever we can, not only to safeguard valuable property but also to protect the forests themselves and their many wild occupants.

In pursuing this practice, however, subtle changes take place over time. Dead trees and fallen branches accumulate and the undergrowth becomes thicker and much more widespread. Finally a fire occurs that we’re unable to stop, one that feeds on all the detritus to produce firestorms so powerful they can at times fundamentally change a whole ecosystem.[1]

The analogy to our economic management in recent decades is obvious, particularly when it comes to the financial system. There too, fires were continuously put out, all with the laudable goal of sidestepping the pain and distress of downturns. Read the rest of this entry »