Should we “get tough” with the banks? (department of secondary consequences)

The EU seems to have that in mind but here is the problem with that idea:

Distressed European Union banks that tap national governments or the region’s €440bn rescue fund for capital will be subject to state-aid penalties, involving compulsory restructuring or – in the worst case – orderly wind-downs…

The proviso – consistent with EU state-aid rules applied throughout the crisis – is likely to discourage banks from seeking public assistance and spur them to shrink their balance sheets instead, raising the danger of a credit crunch, bankers say.

Comments

Who is this "we" you keep talking about? The government? You might as well ask should the banks get tough with the banks.

Tyler is a habitual, unconscious "we" user. It's a serious problem in his brain.

On the other hand, he often talks about public choice issues with great clarity.

Dunno.

Banks that are irresponsible should be allowed, encouraged, or forced (if the irresponsibility and scale is large enough) to shrink their balance sheets, no? These bank bailouts are a scourge that need to be quashed. This is moral hazard writ large.

If someone or some entity is credit-worthy, some (hopefully responsible and solvent) bank somewhere will make the loan. Consumer or business loans need not come from a local or national bank.

Sure. And that may happen over the course of 5, 10, or 15 years. The time to fix banking is 15 years ago or 5 years from now. On the other hand, you don't have to do the band-aid process wrong like we just did. Shrinking the balance sheet or paying interest on reserves or increasing capital requirements punishes the intermediation function when what we want to punish is the avarice function that isn't around right now.

"The time to fix banking is 15 years ago or 5 years from now."

Unless you have access to a time machine, the former is moot. The latter is just wrong.

The perfect time to fix banking is now. Now that there is the disinfectant of daylight shown on banking practices in general and risk-taking in particular. Not 5 years from now when it will be swept under the rug.

"Shrinking the balance sheet or paying interest on reserves or increasing capital requirements punishes the intermediation function when what we want to punish is the avarice function that isn’t around right now."

It's naive to assume that avarice has somehow suddenly disappeared in banking. It's more the case that profits are harder to come by, risk-taking is under more scrutiny, and the three-letter instruments of financial wizardry that everyman came to know about in 2008 are now four letter words.

What else would you expect the banks to say if you were to withdraw a subsidy? There are other ways to expand credit than subsidizing over leveraged banks.

I'm not sure what the point of this post is.

Here's a thought: Perhaps they should regulate banks by paying attention to the credit quality of the loans as they are originated rather than rambling about "decreased access to credit" after the bubble pops.

Of course there's going to be decreased access to credit. That's the POINT, and is actually a sign that sanity might be returning. The reason the world has a problem is because credit was easier to get than a drivers' license.

Perhaps we can print out the compiled works of Tanta as required reading for the EU. It would be nice if the Fed paid attention to her as well, but I can dream.

Why would governments want to "get tough" with their captive lenders?

To make them more beholden, perhaps. Just a little tough.

So, not real toughness, just more restrictions on buying anything other than government debt?

I have no idea. It's just that people take fractional reserve, FDIC, and now soft and hard bailouts as a given and then seem flummoxed that they can't solve the problem, and they blame the banks.

I'll changed this to reflect a couple of years experience based on the not exactly convicted criminal Ackermann, who heads an institution that refuses to take money from any goverment that demands accountability (which is one reason DB was so happy to take other's tax dollars, but never any tax euros).

The change is simple - 'is likely to discourage banks from seeking public assistance - which leads to their wrongdoing being uncovered and punished - and spur them to shrink their balance sheets instead.'

American style bank assistance is the sort of thing that European banks do dream of, it is just they never expect to get it from their own governments - people here don't just occupy some park in protest, they actually elect different governments. And really, it is Merkel that has been talking about taxing financial transactions for years - does anyone think she has simply given up this goal at the urging of leading bankers like Ackermann (who seems just the tiniest bit scared these days, actually - almost as if he knows that he can't keep the vaults locked forever)? After all, the CDU is probably the closest thing the bankers have to a friend these days - and the CDU has been losing to the SPD and Greens steadily as the crisis grows.

To be fair, shouldn't webalsonget tough with the people who decided not to pay back their mortgages? At least tax them on their forgiven debt.

If corporations are people, why should they be able to depreciate the value of their land and investments for tax purposes but people can't?

If corporations are people, why should they be able to declare bankruptcy and have all debt expunged but people can't?

Or, should people be allowed to declare bankruptcy and have all debt expunged including student loans?

Pick one, you don't get both. Nice try, though.

Corporations are not people- has anyone ever said differently? However, they are made up of groups of people.

"Corporations are not people- has anyone ever said differently? However, they are made up of groups of people."

One would think.

http://en.wikipedia.org/wiki/Corporate_personhood
http://www.washingtonpost.com/politics/mitt-romney-says-corporations-are-people/2011/08/11/gIQABwZ38I_story.html

If we let people expunge their student loans, how would we keep the tuition bubble inflated? No one's going to pay 20% on $100K for an advanced degree in Comparative Lit.

Should "we" get tough with the FBI?

Wait, did you just say that the problem with getting tough with banks is that banks don't like the idea? Why yes, I think you did.

The problem with getting tough with the banks is that it would require politicians to grow a spine, and thus will never happen. Just nationalize the whole lot and get it over with, as long as we also make sure none of the people currently in management are ever paid a dime of taxpayer money ever again.

A credit crunch? Can't have that. Companies shut down, and production ceases.

I mean, look at Iceland and how everyone starved after their crisis. It's a desolate, uninhabited land (except for the trolls).

So true! And they are down to only 320,000 people now...

Wait, what? They were already the size of Corpus Christi, TX when their 'nation' was hit by a banking crisis? I guess the Eurozone and American banking sectors should be handled in the same way after all.

Um, people can get credit just fine, for reasonable business plans. All this would mean is that they can't get from clumsy, inefficient, dinosaur banks.

FFS, please stop equating the need for banking with the need for specific banks to stay on life support. Big banks only control so much lending to the extent the government let's them. Stop!

Lets them. No apostrophe.

Other than that, yes.

For thinking about bailing out banks, Gorton's paper, "Slapped by the Face by the Invisible Hand", is a must.

http://www.frbatlanta.org/news/conferences/09-financial_markets_agenda.cfm

Not sure how any of this is new. The banks a la Paulson made the same case during the bailout talks ie. "bail us out or suffer great depression 2.0".

Usually when someone says "unintended consequences" or similar they are against something. I get it Tyler thinks getting tough on banks is a bad idea. I disagree. If a bank fails at its job of providing credit/capital prudently and efficiently, it should be made to fail. Its capitalism. We should try that. If a bank suffers no penalty for failure and in fact gets rewarded, taxpayers will just decide that there's no point to free enterprise, competition, and innovation if there exists a risk-free, taxpayer-supported industry. A rational person would then decide its better to join a too-big-to-fail bank or make lots of friends in DC, there's no point to honest work--the rewards just aren't there. I'm sure there's a social contract issue that looms larger than a failed bank's thinly veiled threat. There are many ways around credit crunches (I'm sure the Fed has 10 ideas right off the top of their heads) but not many against a population and real economy that loses faith.

Moral hazard -- now in fun systemic sizes!

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