04/11/10 Stockholm, Sweden – Paul Krugman, Nobel-Prize winning economist and NYT columnist, recently wrote about his recommendations for financial sector reform. He argues for expanded Wall Street regulation and suggests that banks that are too big to fail should stay that way. Somehow, they’re not a problem in his opinion. Interesting…
From The New York Times:
“Here’s how I see it. Breaking up big banks wouldn’t really solve our problems, because it’s perfectly possible to have a financial crisis that mainly takes the form of a run on smaller institutions. In fact, that’s precisely what happened in the 1930s, when most of the banks that collapsed were relatively small — small enough that the Federal Reserve believed that it was O.K. to let them fail. As it turned out, the Fed was dead wrong: the wave of small-bank failures was a catastrophe for the wider economy.
“The same would be true today. Breaking up big financial institutions wouldn’t prevent future crises, nor would it eliminate the need for bailouts when those crises happen. The next bailout wouldn’t be concentrated on a few big companies — but it would be a bailout all the same. I don’t have any love for financial giants, but I just don’t believe that breaking them up solves the key problem.
“So what’s the alternative to breaking up big financial institutions? The answer, I’d argue, is to update and extend old-fashioned bank regulation. After all, the U.S. banking system had a long period of stability after World War II, based on a combination of deposit insurance, which eliminated the threat of bank runs, and strict regulation of bank balance sheets, including both limits on risky lending and limits on leverage, the extent to which banks were allowed to finance investments with borrowed funds.”
As Krugman mentions, the 30s crisis was accelerated by bank client fears of losing their deposits. And, he’s right that because of the FDIC insuring deposits that sort of scare isn’t supposed to happen anymore. Now, the idea that this relates to the extreme risk taking by investment banks like Lehman Brothers seems like a stretch. By nature, banks, like any other company, always find ways to grotesquely contort themselves around regulation. Extending “old-fashioned bank regulation” is unlikely to help. As long as banks exist that are too big to fail, those institutions will know they still have a blank check to protect themselves on the downside and they’ll just keep on gambling. Since Krugman insists on teaching the “basics” as he sees them, you can read more at The New York Times’ coverage of Financial Reform 101.
Best,
Rocky Vega,
The Daily Reckoning
Rocky Vega
Rocky Vega is publisher of The Daily Reckoning. Previously, he was founding publisher of UrbanTurf and RFID Update, which he operated from Brazil, Chile, and Puerto Rico, and associate publisher of FierceFinance. He specialized in direct marketing at MBI, facilitated MIT Sloan School of Management programs, and has been featured on CBS. Vega graduated with honors from Harvard University, where he was on the board of Let’s Go Publications and directed business programs involving McKinsey, Goldman Sachs, and Harvard Business School faculty. He is also enrolled at the Stockholm School of Economics.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
Firstly, Paul K is loosing his creds with me in particular…he’s starting to “waffle” but what would one expect from a NYT writer.
Second, transparency is the KEY to any two party transaction; “old fashioned” regulation attempted to bring that to the market. And, it tried (tries) to restrain the human indulgence and capitulation to outright greed which is/was the major component, along with the lack of transparency that brought this economy to its knees. Especially when we now are finding out that some of the largest were making huge bets on one side and betting hugely that those bets would fail……..What kind of market is that?????????
We need NO TO BIG to FAIL doctrine, transparency brought about by smarter regulation, and individuals to actually go to jail when these doctrines are violated. Period.
The NY Times article was written on April First – does that explain anything!?
“Too tempting to avoid” (perhaps this is the new Too Big To Fail”)
For other comments see the real tales of April first >
http://talk.2sane.com/news/x-hotels-launch-from-the-founders-of-5-star-raft-hotels/
Best wishes
Live long and prosper
Roger