Explaining the fuss over equity capital requirements

Those who have been paying even peripheral attention to the debates over financial reform since the bailouts have doubtless heard about “capital requirements” and “equity capital” without necessarily knowing what those terms mean. In general, this ignorance is by design. The megabankers and their friends have deliberately confused the conversation by using incoherent phrases like “hold capital.” Their goal is to create the perception that a tradeoff exists between a bank’s resilience and its ability to make loans. There is none. So why do they press the point? It’s all about the bonuses: banks that are more resilient would not be able to pay managers and shareholders nearly as well as the banks we have now.

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Observations from the 29th Annual Cato Monetary Conference

Thanks to my work, I was able to spend most of Wednesday attending the Cato Institute’s 29th Annual Monetary Conference. The speakers were a pretty diverse group ranging from Rep. Ron Paul to Richmond Fed President Jeff Lacker to Professor Allan Meltzer.

The attendees came from even further afield. There were representatives from establishment organizations including the Bank of Korea and the IMF, but there was also a convicted “domestic terrorist.” I sat next to the former general manager of the Wu-Tang Clan. He now makes a living as an adviser to investors interested in sub-Saharn Africa, although he claimed that his real passion is monetary policy. Who can blame him?

The conference was divided into four panel presentations, two speeches, and a lunchtime conversation. I did not stay until the end but I was there for most of it. Additionally, I got a packet of all the papers that were presented during the panels. Some of the topics that were discussed: the role of a central bank, historical and international monetary arrangements, and ways to reform the existing system.

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“Margin Call,” ABX, and Timberwolf

So far, the crisis of 2007-2009 has inspired several films. One was the outstanding documentary Inside Job, which is unique for focusing on the culpability of academic economists. Another was Oliver Stone’s Wall Street: Money Never Sleeps, a sytlized but flawed retelling of the collapse of Bear Stearns and Lehman Brothers. Back in May, there was the HBO movie Too Big to Fail, which purported to tell the story of the TARP bailout.

Now there is Margin Call. It does not tell the story of what happened in 2008, when big firms failed and governments used taxpayer money to bail them out. Rather, it tells the story of 2007. That was when some of the savvier players, particularly Goldman Sachs, discovered that the assumptions governing their risk models for U.S. mortgages needed to be revised.

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EuroTARP or Euro-trip?

In the wee hours of Thursday morning, European leaders agreed on a plan to shore up the continent’s banking system and stem the contagion affecting sovereign borrowing costs in every country from Greece to France. The plan has three parts: the European Financial Stability Facility will be expanded to about 1 trillion euros, Greek bonds held by private banks will be “volunarily” exchanged for new bonds worth half as much, and the banks most affected will get about 100 billion euros to strengthen their capital positions.

It sounds impressive. Two indicators will show whether it is enough: the spread between Italian and German borrowing costs and the share prices of French banks. So far, neither has meaningfully improved—with good reason. The “plan” has not really been finalized. More worryingly, even if it is implemented in full it would fail to address the fundamental problems plaguing the financial system.

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Does a sophisticated modern society need too-big-to-fail banks?

No.

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