My alternative is to encourage new lending by lowering capital
requirements at the margin. Tell banks that loans issued after
September 1, 2009, require half the capital of similar loans issued
before September 1. Some banks are in such bad shape that even with
those lower capital standards they will not be able to make new loans.
Fine. You don’t want those banks to grow. But other banks have room to
grow, and you want them to grow more than they would under the existing
regulations.As with changing accounting rules, lowering capital requirements
ultimately exposes the government funds that insure banks to more risk.
That is the flaw in the idea. However, there has to be some risk
exposure to tax payers for any policy that encourages bank lending.
Here is more. One question I have is how to calculate the existing capital for the very worst, most insolvent, and most corrupt banks. You don’t want them making loans to their uncles, so to speak. Would requiring 1/2 capital discriminate usefully against such banks or would it in fact select for their relative expansion? Or do we have this problem in any case?
Via Brad DeLong, here is a summary of the Dodd plan. It sounds like an improvement over the Paulson plan.
Part of the Dodd plan may be unconstitutional. According to your linked article, it creates a “credit review committee” that consists of five members. Two of the members are appointed by Congress. This may mean that Congress is delegating executive power to a legislative agency, which is something that it is not allowed to do. See Bowsher v. Synar (summarized here: http://en.wikipedia.org/wiki/Bowsher_v._Synar). The remedy: Make those two officials appointed by the President.
While I agree with the principle Dodd’s plan espouses that taxpayers should share in the upside banks get by offloading bad assets to the treasury (whether via warrants or simply grants of stock), setting the compensation at a dollar for dollar level seems too high. After all, in theory the treasury is paying “market prices” for these securities, so they’re already getting something in return.
Say Citi wanted to sell $50bn of CDOs at whatever price they agree to with the treasury – does that mean that the treasury now owns something like 50% of Citi (based on today’s closing price)? Or would they get 2.5bn new shares (based on a value of $20/share from today’s close) and thus have 33% of the equity? Either way seems to be rather exorbitant.
Equity warrants or call options both seem like better options to me. But I don’t know anything.
Well, given that there isn’t going to be an agreement, I’m closing out my money market fund. The commercial paper market will have to take care of itself. So will the VRDO market that funds all those higher education financings. I hope they take the money out of the professors’ salaries.
At the risk of repetition:
Require that some stipulated proportion of paper (loans) brought to the discount window be “new” credits. Then increase that proportion each quarter until it reaches some level (25%?). Get the Fed credit out in the field.
Isn’t the problem that banks won’t even loan to themselves? Why would lower capital requirements help.
What about the liabilities on the other side of those institutions?
I don’t think that the problem is being capital constrained via regulation
I have an asinine question, but first, Hussman has a similar conclusion in his analysis
http://hussmanfunds.com/wmc/wmc080922.htm
Now, maybe I’ve earned my asinine question. What is the difference between lending someone money so they can make a profit, versus lending them money so they might not go bankrupt?
Obviously, banks don’t want to make long-term loans to their competitors when they themselves have short-term liabilities. It would seem interest rates would have to go up, but can they go up in a slowing economy. What if the Treasury stopped selling “risk-free” notes? What if people had to start measuring risk? Okay, maybe that’s more than one asinine question.
I’m going to post this request at a number of econ blogs I read, in case others have suggestions.
I’m feeling, rather desperately, that we need a faster tool for critiquing and comparing the different proposals out there. I want a mechanism by which the experts can point out flaws in different solutions and arrive at an optimal selection (if not consensus). If this all has to happen in a week, the blogosphere needs to be even faster than usual.
Is there a site out there doing that now?
Could wikipedia support this, or would the comment threading collapse under the weight?
Other suggestions?
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it is not bad
it is so complicated
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