Tuesday, June 21, 2016

Glass-Steagall

FLG has been busy and was clearing out a backlog of blog reading.   He was surprised to find a Tweetstorm on Glass-Steagall by Josh Brown.    FLG likes John Brown and is sorta shocked by his take on Glass-Steagall and the financial crisis.

FLG won't rehash his own Glass-Steagall argument in full again, but here are the two main points:

1) It wasn't the big universal banks that went under during the financial crisis; it was Bear Stearns and Lehman Brothers, both risky investment banks.   Bear got bought by whom?  JP Morgan, one of those horrible universal banks made possible by Gramm-Leach-Bliley (GLB), aka the Repeal of Glass-Steagall.   Lehman was allowed to fail.  Who was next Wall Street domino likely to fail after Lehman?  Merrill Lynch.   What happened to Merrill?  It got bought by Bank of America, another horrible universal bank made possible by GLB.

So, GLB actually helped stabilize the system during the crisis.

2) Financial innovation has blurred what were previously very clear financial lines.   Derivatives, so often described as inherently risky, can be cheap, effective tool to reduce risk.   Interest rate swap, to provide one example, allow a bank to manage the interest rate exposure of its loan book quickly and cheaply.   Should we force commercial banks to manage their loan portfolio using a more expensive and slower method to manage the risk because the instrument that is cheaper and faster is perceived as inherently more dangerous?  If we don't ban their use of derivatives entirely, then it's a question of risk management, which, let's be honest, the regulators suck at micro-managing.  So, we are left with fortress balance sheets and leverage ratios.  Not Glass-Steagall's return.



As long-time readers are aware, FLG believes it's the lifting of restrictions on interstate banking, like the Interstate Banking and Branching Efficiency Act of 1994, that were the real problem.   State borders, while political borders without much financial or economic rationale, helped contain the scope and size of banks albeit sub-optimally.  Hence, any particular failure was probably not going to take down the entire system.   Although, the Fed and FDIC didn't risk it with Continental Illinois.

Monday, June 13, 2016

Quote of the day

The New Yorker:
The argument ends by proposing that we are, in fact, digital beings living in a vast computer simulation created by our far-future descendants. Many people have imagined this scenario over the years, of course, usually while high.
 
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